Companies carrying out share buyback should be taxed at 4% of the value of the issue, a new manifesto pledge by the Liberal Democrats has suggested.
In a move echoing a similar levy already in place for the US’s top 100 companies, the policy would raise £1.4 billion and pay for free school meals for an additional 900,000 children growing up in poverty, said Ed Davey, the party’s leader.
“Most share buybacks are by oil and gas giants, big banks and multinational conglomerates that own a number of food and consumer goods brands. In other words, buybacks are being driven by the corporations who are profiting most from soaring prices during the cost-of-living crisis," said the policy document.
“These companies have been making huge, unexpected profits, and they’re spending vast sums on buying back their own shares. Buybacks totalled £52 billion last year, and companies announced another £27 billion in the first three months of this year alone.
“In 2023, BP spent five times more money on share buybacks than on low-carbon energy. That’s simply not right."
The LibDems added that the US levy has already raised US$8 billion, which could rise to US$74 billion over ten years.
Wealth platform AJ Bell said: “It is easy to see why the Liberal Democrats would consider such a plan.
“First, the UK’s aggregate and annual budget deficit do require action of some kind to try and staunch the flow of red ink and rein in the interest bill, which drains away cash that could otherwise be spent and invested more productively elsewhere.
“Second, few tears are likely to be shed by the British public if companies are taxed on getting rid of what they consider to be surplus or excess cash for which they believe they have no immediate or practical use, or where they believe they can get a better return by buying back stock rather than investing in their business.
“The Lib Dems are doubtless hoping that the cash could instead be used to purchase equipment, hire staff or invest in development, sales and marketing.
AJ Bell noted that the US already has a 1% buyback tax, which dates back to 2022 as part of the Inflation Reduction Act, and President Biden plans to hike that to 4% in his second term.
If that happens it could persuade companies who are thinking of defecting to the New York Stock Exchange to think again but “It is hard to predict how UK companies would react in the event of a buyback tax," it added.
“They could, in theory, simply increase their dividend payments and return cash via that mechanism instead, although that could raise the stakes during the next economic downturn as shareholders tend to take news of a dividend cut much harder than they do the announcement of a postponed or cancelled share buyback."
Bell aDDS that the current consensus forecast for aggregate dividend payments from FTSE 100 firms in 2024 is around £80 billion, not too far away from 2018’s all-time high of £85 billion.
“They could conceivably invest more in their underlying businesses, although one change in tax may not be enough to shift their thinking on its own."