Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

Implications of increase in corporation tax

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1195 times
Been thanked: 1280 times

Implications of increase in corporation tax

#393587

Postby richfool » March 8th, 2021, 11:41 am

I spotted this article on the AIC website, but I'm puzzled why the broker should make an issue of the situation with regard to (just) infrastructure and renewable energy companies, unless it's just a bit of scaremongering. Surely it will affect all larger companies?

Budget 2021: Infrastructure and renewables funds hit by corporation tax hike

The corporation tax hike will hit the valuation of listed infrastructure funds, including those investing in renewable energy assets, says stockbroker Stifel.
The chancellor’s decision to hike corporation tax in today’s budget will hit the valuation of listed infrastructure funds, including those investing in renewable energy assets, according to stockbroker Stifel.

Rishi Sunak announced corporation tax would increase from its current level of 19% to 25% from April 2023, one of a number of moves aimed at reining in the ballooning UK deficit.

That will see infrastructure funds pay a higher rate of tax on the income they derive from their assets. The change will not just result in a smaller pool of income to pay shareholders dividends but will hit their underlying valuations, which are linked to their future cashflows.

https://www.theaic.co.uk/aic/news/cityw ... n-tax-hike

Laughton
Lemon Slice
Posts: 905
Joined: November 6th, 2016, 2:15 pm
Has thanked: 140 times
Been thanked: 330 times

Re: Implications of increase in corporation tax

#393593

Postby Laughton » March 8th, 2021, 11:51 am

Presumably because these funds, by their nature, rely on being/becoming very large businesses generating large amounts of taxable income so will be subject to the maximum rate of CT but their raison d'etre is as dividend generators.

So, from 2023, they will pay maximum CT and therefore have less post tax revenue to pay out as dividends so the yield will therefore have to be lower than it otherwise would be. Discount these lower yields and the present day valuations of the companies should come down.

But, as you say, the same could be said for many other large companies although they might have more room to increase prices.

PinkDalek
Lemon Half
Posts: 6139
Joined: November 4th, 2016, 1:12 pm
Has thanked: 1589 times
Been thanked: 1801 times

Re: Implications of increase in corporation tax

#393626

Postby PinkDalek » March 8th, 2021, 1:33 pm

richfool wrote:I spotted this article on the AIC website, but I'm puzzled why the broker should make an issue of the situation with regard to (just) infrastructure and renewable energy companies, unless it's just a bit of scaremongering. Surely it will affect all larger companies? ...


Well I'm confused as well.

I know nothing of Infrastructure and renewables funds but why would they pay Corporation Tax on dividends received (assuming not Foreign dividends)?

Assuming they don't, I believe the article is considering the underlying investments. Those UK companies presumably would be paying a higher rate of CT, thus leaving less available for distribution. If that's the case, the underlying valuation of the investments is reduced, which is why they write "but will hit their underlying valuations, which are linked to their future cashflows". There'll also probably be a further hit to the (what used to be known as) Balance Sheets in those underlying investments, due to higher provisions for Deferred Taxation once the Legislation is substantially enacted.

Maybe the That will see infrastructure funds pay a higher rate of tax on the income they derive from their assets is talking of potential Corporation Tax on chargeable gains on disposals, although they do say "income".

mc2fool
Lemon Half
Posts: 7812
Joined: November 4th, 2016, 11:24 am
Has thanked: 7 times
Been thanked: 3017 times

Re: Implications of increase in corporation tax

#393647

Postby mc2fool » March 8th, 2021, 2:38 pm

richfool wrote:
...but will hit their underlying valuations, which are linked to their future cashflows.

The answer is in that part of that sentence.

The Net Asset Value (NAV) of most investment companies, like SMT, FCIT, CTY, etc, etc, is arrived at by simply adding up the market value of the underlying investments. However, infrastructure companies do it differently, as their underlying investments (usually) aren't market traded. Instead they use a discounted cash flow analysis of the forecast investment cash flows from each project to arrive at the NAV.

So, if tax takes a larger chunk of the forecast future cash flows, the NAV must drop. HICL Infrastructure's annual report has a detailed explanation of how their portfolio is valued (i.e. how they arrive at the NAV), including a breakdown of how changes in the discount rate, inflation, tax rate, interest rates, etc, etc, affect the valuation.

https://www.hicl.com/wp-content/uploads/2020/05/HICL-Annual-Report-2020-1_0.pdf, section 3.4, pages 58-67. On page 66 we find:

"Corporation Tax Rate Sensitivity

The profits of each portfolio company are subject to corporation tax in the country where the project is located. The sensitivity considers a 5% movement in tax rates in all jurisdictions. The UK corporation tax assumption for the portfolio valuation is 19%, which is up from 17% at September 2019, in line with the budget announcement made in March 2020. These changes have resulted in a decrease to the portfolio valuation of £29.9m which is included within the £58.4m aggregate reduction in portfolio value attributable to changes in economic assumptions.
"

Alaric
Lemon Half
Posts: 6035
Joined: November 5th, 2016, 9:05 am
Has thanked: 20 times
Been thanked: 1401 times

Re: Implications of increase in corporation tax

#393653

Postby Alaric » March 8th, 2021, 3:21 pm

Laughton wrote:But, as you say, the same could be said for many other large companies although they might have more room to increase prices.


More scope as well for structuring their affairs to minimise Corporation Tax.

richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1195 times
Been thanked: 1280 times

Re: Implications of increase in corporation tax

#393722

Postby richfool » March 8th, 2021, 7:14 pm

Thank you all for your thoughts and clarification, particularly mc2fool.

I note in their recent RNS - Company announcement, TRIG (The Renewable Infrastructure Group), the Investment Manager said:
Following the UK Budget statement on 3 March 2021, the Chancellor of the Exchequer announced that UK Corporation Tax is to increase from the current rate of 19 per cent. to 25 per cent. with effect from April 2023. The Investment Manager estimates that this change, taken in isolation, would reduce the December 2020 NAV by approximately 3 pence per Ordinary Share.

So the affect on NAV estimated at 3p per share.

https://www.investegate.co.uk/renew-inf ... 00042579R/


Return to “Investment Strategies”

Who is online

Users browsing this forum: No registered users and 13 guests