Liberal Democrat manifesto proposes a 4% tax on share buybacks. Based on buyback announcements to date in 2024 this would raise £1.5 billion in revenue. The US already has a 1% buyback levy and President Biden also wants an increase to 4%.
“Political parties facing the tatty state of the UK’s public finances will have to confront a choice between austerity or higher taxes and just looking the other way and hoping something turns up. The Liberal Democrats have set their sights on some incremental revenues from additional levies on big banks, social media and technology giants and also a fresh tax on share buybacks,” says AJ Bell investment director Russ Mould. “Based on the £36.7 billion tally of buyback announcements from members of the FTSE 100 index to date in 2024, this would raise around £1.5 billion.
Source: Company accounts
“Nor is that guaranteed to be a final total, as the FTSE 100’s members returned £58.2 billion to their shareholders via buybacks in 2022 and the current run rate is on track to beat that.
“It is easy to see why the Liberal Democrats would consider such a plan.
“First, the UK’s aggregate and annual budget deficit do require action of some kind to try and staunch the flow of red ink and rein in the interest bill, which drains away cash that could otherwise be spent and invested more productively elsewhere.
“Second, few tears are likely to be shed by the British public if companies are taxed on getting rid of what they consider to be surplus or excess cash for which they believe they have no immediate or practical use, or where they believe they can get a better return by buying back stock rather than investing in their business. The Lib Dems are doubtless hoping that the cash could instead be used to purchase equipment, hire staff or invest in development, sales and marketing. This may not bring the immediate tax income that the buyback tax may generate, but the idea will be that tax income will benefit over time as the economy grows, thanks to that additional investment, hiring and activity.
“Finally, it may not fall foul of Wriston’s Law of Capital, namely that capital ‘will go where it is wanted and stay where it is well treated.’ Proponents of this rule of thumb will always rail against higher taxes in the view they make capital feel less welcome and drive it away. The danger here could be that more UK plcs choose to leave London and head for New York, but it may not be quite so simple – at least if President Biden wins a second term in the White House in November. The USA already has a 1% buyback tax, which dates back to 2022 as part of the Inflation Reduction Act, and President Biden plans to hike that to 4% in his second term. If that happens it could persuade companies who are thinking of defecting to the New York Stock Exchange to think again.
“It is hard to predict how UK companies would react in the event of a buyback tax. They could, in theory, simply increase their dividend payments and return cash via that mechanism instead, although that could raise the stakes during the next economic downturn as shareholders tend to take news of a dividend cut much harder than they do the announcement of a postponed or cancelled share buyback. The current consensus forecast for aggregate dividend payments from FTSE 100 firms in 2024 is around £80 billion, not too far away from 2018’s all-time high of £85 billion.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“They could conceivably invest more in their underlying businesses, although one change in tax may not be enough to shift their thinking on its own.
“One factor in the buyback boom, both here and in the USA, has been record-low interest rates and ultra-loose monetary policy. This has left firms earning nothing on the cash they have in the bank and as a result they have sought to earn a higher return on it through buybacks, while currying favour with shareholders. Higher interest rates in 2022-24 have done little to alter this, owing to how inflation means real (post-inflation) returns on cash are still limited and there remains a lack of visibility on what central bankers may do next – although they now seem more predisposed to looser policy again, even if inflation remains above the 2% targets that monetary authorities must meet in many jurisdictions.
“According to the website CBRates, the tally of global interest rate cuts in 2024 already stands at 70, after the reductions from the Bank of Canada and the European Central Bank this month, and the Bank of England is expected to join in by late summer or early autumn.
“The trend back toward lower rates and thus lower returns on cash, through financial repression designed to help governments cope with their otherwise crippling interest bills, is potentially a deterrent to investment, not something that encourages it, at least in the eyes of some. An artificially low cost of capital may deter firms from investing, as it leaves them unsure what is an appropriate risk-adjusted rate of return on that money, and they may simply play it safe by handing the money back to shareholders.”
