23 March 2017

Week in Brief: Business and the City

WITHOUT A PADDLE: Thames Water have been fined £20 million for pumping almost one and a half billion litres of untreated sewage into the River Thames in 2013 and 2014, killing birds, fish and dragonflies and polluting the river, normally an attractive feature of Henley and Marlow, with nappies and other debris.  As five different installations were involved in the leaks, the judge concluded that top management must have been aware of what was going on.  The company has apologised.  Thank goodness it didn’t happen in the regatta season!

WALL STREET: Some put the fall in Wall Street this week down to doubts as to whether the new US administration will be able to deliver on promised tax cuts. Others, however, are concerned that US stocks are overvalued with the S&P 500 trading at 18.5% times expected profits.  Recent polling also suggest that investors are underweight in UK stocks, with a reduced level of new equity investment.

A MATTER OF TIMING: Conventionally, figures showing that inflation is now running at above 2% might be expected to mean that recent falls in interest rates must soon begin to reverse. For the moment however the Bank may seek to “look through” the recent inflation figures on the basis that longer projections show a return to 2% level, but there must be a limit to how long that policy can last, particularly in view of the recent increase in US interest rates by ¼%.  Interest rates are going to go up sooner or later and we would all prefer that the process was smooth and gradual. There are obvious risks in leaving it too long. (See moving the interest rate goal posts)

TAXATION OF DIVIDENDS: By how much should you reduce tax on dividends received by shareholders to take account of the fact that the profits distributed have already born corporation tax within the company?  That question has bedevilled the UK’s tax system for many years.  Before the European Court of Justice declared it illegal, we used to have an imputation system. That meant that a dividend paid by a UK company was accompanied by a tax credit, redeemable in cash by the recipient to the extent that it could not be set against his or her tax bill. This allowed all shareholders, including non-taxpayers such as pension funds, to get a rebate for some of the tax which had been paid on the underlying profits.

That all went wrong when the ECJ forbade of the charging of advance corporation tax, which safeguarded the Exchequer by ensuring that the tax paid by the company was at least equal to the tax credits given.  So the tax credit ceased to be something that could be cashed in and became an element in the computation of tax on the dividend.  That hit non taxpayers such as pension funds who now received no compensation for the tax paid on the company profits.  Individual taxpayers, however, benefitted from the tax reduction and, until last year, the combined effect of the tax credits and special dividend rates produced a charge of 0% for the basic rate (ie 20%)taxpayer, 25% for the upper rate (ie 40%) taxpayer and 30.6% for the additional rate (ie 45%) taxpayer.  Now, following the abolition of tax credits and ignoring the £2000 tax free dividend allowance as trivial, the rates will be 7.5%, 32.5% and 38.1%.  Those who work by reference to net income will be rebalancing their portfolios but the fact that the markets are dominated by institutions who will be unaffected by the change means that it will probably not affect prices.

KEY MARKET INDICES: (as at 22 March; comments refer to changes since last issue; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (slight fall);

Euro€: 1 mth 0.39% (rise); 3 mth 0.36% (rise);

US$: 1 mth 0.98% (rise); 3 mth 1.16% (rise);

Currency Exchanges:

£/Euro: 1.15, £ rise

£/$: 1.25, £ rise

Euro/$: 1.08, € rise

Gold, oz: $1,241, rise

Copper, tonne: $5,766, rise

Oil, Brent Crude barrel: $50.4, fall

Wheat, tonne: £144, fall

London Stock Exchange: FTSE 100: 7,327 (fall). FTSE Allshare: 3,984 (fall)

 

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