What would ‘Robin Hood’ tax mean for UK investors?

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After being at the centre of debate for more than three years, the financial transaction tax has come back under the spotlight after shadow chancellor John McDonnell announced he would back it coming into force in the UK.

The so-called Robin Hood tax would create a shift in investment behaviour as well as harm the competitive power of the UK, experts say.

Last week, McDonnell reportedly told a fringe Labour conference meeting that he had reached an agreement with shadow business secretary Angela Eagle over the tax, and that he wanted to debate within the party before making it policy.

Chancellor George Osborne has fought moves to introduce such a tax several times, warning it would harm the financial sector.

Similar to the Tobin tax, which was proposed for foreign currency exchange only, the Robin Hood Tax would affect a wider range of asset classes including the purchase and sale of stocks, bonds, commodities, unit trusts and derivatives.

The Robin Hood tax rate would vary but would average about 0.05 per cent on financial transactions.

According to the European Commission the tax could raise €57bn (£42bn) every year, of which around €10bn would go to the UK.

Earlier in September, the newly elected Labour leader Jeremy Corbyn backed the introduction of an EU FTT – a 0.1 per cent tax on share and bond trades and a 0.01 per cent levy on EU derivative transactions.

Hargreaves Lansdown head of investment research Mark Dampier says the whole idea of the Robin Hood tax “is a complete nonsense” as the UK has the stamp duty, which is already a transaction tax.

The stamp duty brings in more than £3bn every year to the UK, according to HMRC.

Dampier says: “We don’t need any more new taxes, what we need is a complete reform of what we already have.”

The Italian example

Previous examples of such a tax have been seen. In December 2012, Italy introduced the Robin Hood tax on corporate bond, stock and derivative trades.

Investment Association director of tax Jorge Morley-Smith says the Italian experience is “an interesting one” and the expected results of the tax have been different from reality.

The levy in Italy has, in fact, only raised €159m of the targeted €1bn during the FTT’s first year as investors switched their investments away from domestic equities and toward platforms, and asset classes where the tax’s impact was lowest.

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AJ Bell investment director Russ Mould says in Italy the FTT scheme now levies 0.2 per cent on over-the-counter transactions and 0.1 per cent on those executed via a regulated exchange or multi-lateral trading facilities.

Considering the impact of the FTT on the UK market, Mould says: “Add [the FTT] to the 0.5 per cent stamp duty, the bid to offer spread, the £1 flat levy for the Panel of Takeovers and Mergers that applies to any purchase over £10,000 and also broker commissions and extra cost will soon add up.”

Under the Italian model, derivative trades are also subject to the FTT, although Government debt is not, Mould explains.

He says this approach could “in theory” suit the UK, as the national debt is still large, so encouraging investors to help fund it by buying gilts “would make sense”, especially if Labour is considering a less austere fiscal policy.

Investment shift?

Although the actual impacts of the FTT are not definable yet, Morley-Smith says the tax would eventually cause a shift in investor behaviour.

In the UK the fear among pension funds and IFAs is that the Robin Hood tax will raise their costs of doing business and that ultimately will get passed on to the consumer.

He says: “Our main worry is that in the long-term this tax will impact people’s savings. There’ll be increased costs and lower returns for even small transactions.”

Brian Mulholland, an international tax expert at Kreston Reeves, also says there are “quite a wide range of impacts” on the stock markets but “we are not quite sure how this would affect behaviour”.

The Robin Hood tax would also create complexity as people will start moving large amount of money outside their countries, Mulholland also says.

Given how sophisticated the UK equity market is it is not quite clear how much it would depress trading over time, he says, but it would definitely have an effect because it’d become more expensive to trade.

“There could be a shift away from domestic equities,” says Mould, “but the cost of the FTT would have to be set against any extra fees incurred for currency transactions and also foreign exchange risk, both of which could exceed the impact of any additional transaction tax.”

An additional levy on financial transactions could potentially slow down the growth of equity markets, experts add.

Mould says: “If the FTT does any good, it will be to remind investors of Warren Buffett’s comment that ‘excitement and expenses’ are the enemy of the investor – so it could conceivably slow trading down.

“That would be good from a cost point of view, potentially awkward when it comes to market liquidity at a time when regulatory pressures seem to be affecting market volumes anyway as banks commit less capital and take less risk.”

Competition harm

Experts also argue that implementing a FTT, like any other tax on financial transactions, would considerably affect the global competitive advantage of the UK in the financial services sector.

Dampier says: “Financial services are despite what some people think generally a success, so why do you wish to burden them with more taxes, which inevitably makes us less competitive in a global world? This is a three step back move.”

Wingate Financial Planning director Alistair Cunningham says the FTT will put the UK in a significant disadvantage to other nations who rely more on manufacturing or other sectors.

He says: “It just seems unreasonable to hit one industry rather than another. It makes sense to tax tobacco more, because there is some evidence it would harm people’s health, for example.”

Investment Quorum chief executive Lee Robertson adds that a Europe-wide tax will hit the UK harder as other countries in Europe don’t have the investment banking presence that the UK has.

He says: “A lot of EU governments would love a slice of the London financial sector so I suspect they’ll be pretty happy for the Robin Hood tax to come across Europe because they’ll see some redistribution by making the UK less competitive.”

He adds that he’d prefer the levy to affect much more speculative financial instruments, such as hedge funds and high frequency traders, rather than equities.

However, ultimately Morley-Smith says that it is difficult to determine the impacts of the Robin Hood tax because “its scope is still unclear”.

He says: “In the UK the Government is trying to encourage people to invest and save more but that will not make sense if the Robin Hood tax gets implemented.”