tax notes international - Tuck School of Business - Dartmouth College

U.K. Tax Update
Buddy, Can You Spare a Dime?
by Trevor Johnson
Trevor Johnson, FTII, AITI, ATT, is a chartered tax adviser and a past president of the Association of
Taxation Technicians. However, the views expressed are entirely his own.
In the words of Private Frazer of the popular British
sitcom Dad’s Army, ‘‘We’re all doooomed!’’ Socalled
experts are queuing up to outdo each other with
prophesies of gloom and despondency. The Bank of
England base rate, which stood at 5 percent last September,
is now at 1.5 percent. This is the lowest rate
since the bank was formed in 1694, the year in which
Sir Isaac Newton discovered gravity and about 80 years
before the United States came into existence.
The Bank’s Monetary Policy Committee meets
again on February 5, when some commentators expect
a further cut and predict that at some point this year it
will end up at, or very close to, zero. These dramatic
reductions conjure up an image of desperation; the
bank is at the wheel of the British economy careering
down the mountain toward the abyss, and is pumping
the foot brake harder and harder because that’s all it
can do.
And yet as far as businesses are concerned, the base
rate is meaningless as the banks are neither passing on
the reductions to existing borrowers nor advancing new
loans. Their point is that the London Interbank Offered
Rate, the rate at which banks borrow in the London
Interbank Market, is 2.7 percent for 12-month sterling.
They also have become more defensive since the
subprime fiasco and are trying to rebuild their capital
and profitability, which is why they are incurring the
wrath of the government and the public at large. We,
the public, see the government giving our money to the
banks so that they can lend it back to us — a crazy
situation, but one that isn’t working as the money is
sticking in the bank’s coffers.
After handing out £37 billion to the banks, the government
has introduced two sets of measures to increase
the banks’ liquidity and get them lending again.
These include:
• Guaranteeing up to 50 percent of borrowings to
businesses with turnovers below £500 million and
taking as security some of the banks’ ‘‘toxic’’ investments
and loans.
• An extension of the Small Business Finance
Scheme outlined in last autumn’s prebudget report,
available to businesses with a turnover of up
to £25 million. This scheme will guarantee 75 percent
of loans of up to £1 million over 10 years.
• The establishment of a fund to allow businesses
to sell debt to the government in exchange for
equity. In other words, they will swap some of
their debt for a slice of their business. Companies
with a turnover of up to £50 million will be able
to gain equity of between £250,000 and £2 million.
• Allowing banks to take up government insurance
against their expected bad debts, but only up to 90
percent of those loans.
• The Bank of England buying high-quality assets
from companies in all sectors in return for cash.
• Restructuring last October’s bailout by allowing
Northern Rock more time to repay its government
loan and allowing Royal Bank of Scotland to issue
ordinary shares to the government in exchange
for the preference shares to reduce the
dividend burden on the bank.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 411
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