The UK Parliamentary general election on May 7 will set the scene for possible changes in the general economic climate and some areas of specific concern to asset finance. However, the implications may not become clear until some weeks later.
Historically the “first past the post” UK Parliamentary voting system, where seats won do not necessarily match votes cast, has tended to produce an overall majority of seats for a single party; but in recent years regional divergences in patterns of party support have made such an outcome less likely. Currently it seems clear that either one of the two main parties – the Conservatives (or Tories) and Labour – will either form or lead the next government. It seems much less likely (though far from impossible) that either of them will command a Parliamentary majority alone.
Other parties who could win substantial numbers of seats include the separatist Scottish National Party (SNP); the Liberal Democrats (or Lib Dems); the Democratic Unionist Party (DUP) in Northern Ireland; and the anti-EU UK Independence Party (UKIP), currently forecast to come third in total votes but to win few seats.
It is generally expected (though again not certain) that one of the two main parties, with another single party, will between them take a majority of seats. In this case the likely outcomes would include:
a minority Labour government supported by the SNP (which has said that it would not support a Tory one); or
a two-party coalition including the Lib Dems – which could be either a continuation of its present coalition with the Tories or a switch to one with Labour. As between the two, the Lib Dems would probably prefer a deal with whichever party held the more seats, especially if that party had also won a plurality of votes.
In any event, in the absence of a majority for one party a prolonged period of deal making could follow the election before the consequences becomes clear. Concentrating on issues relevant to asset finance, below we look at the manifesto commitments of the two main parties, together with some relevant proposals by other parties – e.g. where they have drawn “red lines” on the acceptable terms of possible deals with a major party.
Most of these proposals affect the UK as a whole. In some cases as specified, they affect either England only, or Great Britain (excluding Northern Ireland), due to the relevant matters being devolved in Scotland, Wales and/or Northern Ireland, to bodies that are not up for election at this time.
The Tories are committed to holding a referendum (scheduled for 2017) on the UK's continued membership of the EU. This would follow moves to”negotiate a new settlement” in the UK's relationship with the EU.
The areas where specific pre-2017 renegotiation is called for in the Tory manifesto are relatively few. Not all of them are clearly distinguished from longer term objectives for change in the EU, assuming that the UK were to remain a member state after 2017. A high proportion of the specific concerns is clearly focused on financial services.
The Tories say: “We will resist EU attempts to restrict legitimate financial services activities”. They also say: “We would not let the integration of the Euro zone jeopardize the integrity of the single market”.
The Tories promise to end the UK's commitment to “ever closer union” (in the 2007 Lisbon Treaty); and they put forward a proposal for national parliaments “to be able to work together to block unwanted European legislation”.
Beyond that the only specific “renegotiation” commitment in the manifesto is one where agreement with other member states is perhaps already in sight (concerning social benefit rights for migrants from one EU country to another). Given the possible outcome of prior negotiations, it is generally expected that a Tory government would recommend a referendum vote in favour of the UK staying in the EU. The prospect of a referendum could nevertheless bring some economic uncertainty over the next two years; while a possible UK vote for exit would bring much greater uncertainties, pending a resolution of the UK's subsequent relationship with the EU.
Labour proposes for the UK to remain in the EU, promising a referendum only on the subject of any future major transfer of powers from national to EU level. The Lib Dems make a similar commitment, with the difference that any such referendum would be on an In/Out basis rather than on the subject of the relevant transfer of powers. While the Lib Dems oppose the Tory proposal for an In/Out referendum as the powers of EU institutions stand now, they have not made this a “red line” issue for the continuance of the present coalition.
UKIP and the DUP would both support the Tories' proposal for a 2017 referendum.
The UK's fiscal deficit, though roughly halved in the past five years, currently remains among the highest in the world following the damage done to tax revenues by the sharp recession that followed the 2008 “credit crunch”. The parties' proposals for further reducing it are of key importance. This is an area where the attitudes of minor parties could be critical in the event of post-election negotiations over coalitions or degrees of support for a minority government.
The Tories promise to eliminate the deficit by the 2017/18 financial year. Labour makes a less ambitious promise, to reduce the deficit each year and to produce a current budget surplus (i.e. excluding public capital expenditure) after five years.
Both the main parties have ruled out increases in most of the main tax rates affecting the personal sector (the Tories going slightly further in this respect than Labour). At the same time both propose a number of specific expenditure increases – most notably the Tories in the case of road and rail infrastructure projects. It is clear that either party in government would have to make a number of expenditure cuts that have not been determined (or at least not specified) at this stage – especially so with the Tories.
Labour (and the SNP) propose a number of personal tax increases affecting high earners, but these seem unlikely to have a material impact on the overall budget balance.
The Lib Dems are somewhere between the two main parties on the deficit reduction target. They set out three commitments: to eliminate “the structural current budget deficit” ( i.e. allowing for the revenue impact of the economic cycle as well as excluding capital spending) by 2017/18;
from that year, to reduce outstanding national debt as % of national income in each of the next three years, excluding the possible revenue effects of any economic recession; and
“over the economic cycle”, to balance the budget except for “productive” public investment – an undefined aggregate, but clearly a smaller one than total capital spending.
These Lib Dem targets are significant since the party's leader (current Deputy Prime Minister Nick Clegg) has made them a “red line” in the sense of ruling out any coalition programme for less ambitious deficit reduction targets. This would complicate any post-election negotiations with Labour; while a separate Lib Dem “red line” - insisting on expenditure increases on education and child care – could pose difficulties for the Tories. Unlike the two main parties, the Lib Dems have not themselves ruled out personal tax rises at most income levels; but any coalition deal would have to be with a party that does appear to be largely ruling them out.
The SNP, while accepting the idea of reducing the deficit each year, has called for an “end to austerity”, and for overall public expenditure to be increased each year. To varying degrees, all parties are banking on a continuation of the UK's current relatively strong economic growth performance to deliver increased tax revenue.Corporate tax
In its manifesto Labour proposes to stop the final 1% reduction to 20% in the UK corporation tax (CT) rate due next year. At other times recently the party has suggested the tax rate should be 22%, but its manifesto promises to retain “the most competitive rate among G7 countries”. By contrast the Tories oppose any increase (implicitly from 20%) in the CT rate.
All parties promise largely unspecified future action against CT avoidance. Both the main parties propose to require international companies to publish country-by-country breakdowns of tax payments in their financial reports – though the Tories would make this conditional on a multilateral inter-governmental agreement.
The Tories have promised “a new, significantly higher, permanent level” for the annual investment allowance (AIA). This provides a 100% write-off for a limited annual value of capital expenditure on plant and machinery for each individual business, thus favouring investment by SMEs. The proposal was foreshadowed by Chancellor of the Exchequer George Osborne in his March Budget statement this year. In the absence of further changes, the AIA would be due to fall at the end of this year to only £25,000 from its current level, first introduced as a temporary stimulus, of £500,000.
This proposal could have some impact on the future structure of asset finance agreements. For the AIA, where available, supports assets taken on hire purchase or conditional sale type agreements , where the customer claims capital allowances. It does not do so on finance or operating leases (without the passing of legal title in the asset) where such allowances are claimed by the lessor, whose own AIA would be insignificant in relation to its leasing portfolio.
Also in line with a previous government announcement, the Tories make a conditional promise to allow devolved control of the CT rate in Northern Ireland. This is conditional on “the executive meeting its commitments” (i.e. on the Northern Ireland political parties resolving a current impasse over their devolved budget). The DUP supports this proposal, and (in common with the other main Northern Ireland parties) the setting of a low CT rate if and when permitted.
Given a separate CT rate for Northern Ireland, finance companies, their customers and other counterparties, if trading in both Great Britain and Northern Ireland, would all have to apportion their UK taxable profits or losses as between these two territories. Except for the difference of rates, however, the CT computation rules would remain common for the whole of the UK.Banking and business finance
The Tories promise to continue the Funding for Lending (FFL) scheme, presently committed up to the end of this year, into 2016. This scheme is a stimulus measure providing central bank funding for commercial banks' advances to business customers. It supports banks' leasing business direct with end-users, though not their funding of non-bank lessors. Labour makes no commitment on FFL.
Both the main parties stress the importance of encouraging new challengers in the UK banking market. Both also appear committed to selling the government stakes in RBS and Lloyds Banking Group, as and when financial market conditions allow. However, the Tories make a more specific commitment to such sales, whereas the Labour manifesto merely commits to use of the sale proceeds for public debt reduction.
Both main parties have manifesto commitments in support of the bank levy – a new tax introduced by the present government in 2010, effectively an annual balance sheet tax on their use of wholesale market funding. Being based on the global balance sheets of UK based banks, it bears relatively heavily on international banks such as HSBC and Standard Chartered Bank that base their global head offices in the UK. Labour proposes a further increase in the levy rate, while the Tories merely promise to keep the levy in place.
Labour also commits to the introduction of a tax on bank bonus remuneration. This would appear to be a permanent version of the one-off tax imposed on bank employers by the previous Labour government in 2009/10. On that assumption, the scope of the tax would seem likely to be based on a broad definition of banking, but might not apply to asset finance companies who are not retail deposit takers and do not have banking licences.
The Tories commit to the completion by 2019 of the “ring fencing” of banks' regulatory capital, as between their retail and investment banking arms, for which the primary enabling legislation has now been enacted.Leasing and the public sector
In the national health service (NHS) and/or in the education sector in England, the main parties' manifestos make some commitments that may have relevance to the scope for the use of private sector equipment finance – where the UK leasing industry has recently called for the market to be opened up.
On the NHS, Labour's commitments in this respect appear negative. The party commits itself to “stopping the drive towards privatization”, making the NHS trusts the preferred providers in the commissioning framework, and imposing a cap on profits wherever private firms are involved in providing clinical services. Although none of this necessarily precludes the use of equipment leasing contracts by NHS trusts, the emphasis seems to be against private sector involvement irrespective of value-for-money considerations.
In schools by contrast, Labour proposes to give local authority maintained schools the same financial freedoms as other state schools (i.e. free schools and academies); while the Tories promise to expand the free schools sector. Both parties' proposals thus seem to allow more scope for private sector equipment finance in schools.Diesel vehicles
In one area of concern to some lessors, all the parties' manifestos have been overtaken by a judicial development during the election campaign. This week's ruling by the UK Supreme Court, in a case brought by the ClientEarth environmental law group, requires the UK authorities to report to the European Commission by the end of this year with proposals to meet EU requirements to reduce nitrogen dioxide (NO2) emissions. This will principally affect diesel vehicles.
In the UK, as in many other European countries, the use of diesel cars has been encouraged by the authorities in recent years, through road tax and motor fuel tax differentials, on account of their relatively low CO2 emissions. These policies may now need to be reversed, because of diesel engines' relatively high levels of NO2 and other emissions relevant to localized air quality. If so, there could be severe adverse implications for residual values (RVs) of diesel car fleets; and perhaps to a lesser extent, positive RV implications for petrol alternative models.
The Tories have not specified air pollution targets among the areas where they call for EU powers to be returned to national level. Both of the main parties' manifestos made similar unspecific commitments to tackle air pollution.
The Lib Dems went further, promising low emission zones in towns with air pollution problems. Such zones would involve capping NO2 emissions for specific types of vehicle and restricting local access for non-compliant ones – and/or in the case of the London congestion charge zone, differential road use charges for diesel vehicles.
Low emission zones now seem likely to be part of the solution, irrespective of the election outcome. This could affect RVs for commercial vehicles as well as diesel cars.Employment law
Although it does not have specific implications for financial services, employment law in Great Britain is the subject of perhaps the greatest area of difference between the two main parties, and this could of course affect the whole of the business sector.
Labour proposes a number of moves to make employment laws more onerous for employers, including:
a virtual prohibition of “zero hours” employment contracts;
restrictions on employers' use of agency staff; the abolition of fees for employees bringing cases in industrial tribunals;
unspecified moves to “bear down on disguised employment” (focused on service contracts with self-employed workers);
moves to “tackle the growth” of unpaid interns;
a doubling of paternity leave entitlements, with a near-doubling of paternity pay.
Labour also calls for the retention of all EU employment regulations.
The Tories propose one additional burden for larger employers, in the form of an extra three days of annual paid leave to be available for “volunteering” work. Both the main parties commit to raising the minimum wage over the next Parliament to £8 per hour (Labour only a little earlier than the Tories). Both also propose increased training requirements for British based employees in the case of employers recruiting skilled workers from outside the EU; and for large employers to be required to publish information on their “gender pay gaps”..
On the other hand the Tories propose a few changes that would favour employers within the laws governing industrial disputes.