Financial Reform

Financial Reform -

UK Credit Ratings Downgraded

The UK has seen a downgrade in its credit ratings in the wake of the Brexit vote. Ratings agencies took the decision to downgrade the UK’s ranking as a borrower following the public’s vote in favour of leaving the EU and the resultant economic turmoil.

One of the main credit rating agencies, S&P, previously gave the UK a AAA credit rating, the highest offered by the agency. It has now downgraded the credit rating assigned to the country to AA, two levels below the previous rating. Previously, S&P had been the only credit rating agency to maintain a top-level rating for the UK. The agency said that the UK public’s decision to exit the European Union was likely to “weaken the predictability, stability, and effectiveness of policymaking in the UK” and this was reflected by the downgrade in the country’s credit rating.

Another major credit agency, Fitch, reduced the UK’s former AA+ credit rating to a lower AA. As a key reason for the decision to downgrade, Fitch cited the expectation that the short term would see an “abrupt slowdown” in the UK’s growth.

The downgrading of credit ratings for the UK by S&P and Fitch follows a previous move by Moody’s, another ratings agency. On Friday, following the revelation that the UK had chosen to leave the EU, Moody’s downgraded the credit outlook of the UK from “stable” to “negative.” In explanation for this move, Moody’s talked of a “prolonged period of uncertainty” that was likely to follow the vote in favour of a Brexit, and said that the result of the referendum was likely to have “negative implications for the country’s medium-term growth outlook.” The negative impact on economic growth would, Moody’s predicted, outweigh any financial benefits gained from not paying into the EU.

These cuts to the country’s credit rating mean that the UK is now perceived as having a higher risk profile when borrowing. This can make it more costly for the government to borrow money. In international financial markets, as with credit for individuals and businesses, a poorer credit ratings tend to be reflected by higher interest rates.

Just shortly before S&P and Fitch announced the downgrades in the credit ratings issued to the UK, Chancellor George Osborne sought to issue reassurance about the future of the British economy. He insisted that though there would be a need to “adjust” to a new situation, the UK economy would approach its future “from a position of strength.”

Facebook to Pay More Tax in the UK

Facebook-LogoFacebook is to see its UK tax bill increase by millions of pounds following a huge reform of its tax practices. The social networking giant implemented the reforms following heavy criticism of the practices it uses to minimise the amount of tax it pays on its UK advertising revenue.

Previously Facebook, like a number of other major companies, used complex business structures to divert its UK profits through overseas offices. As such, though the profits were generated in the UK, they were largely recorded as taking place overseas. Effective rates of tax paid to the UK government by multinational companies using these tactics can be extremely small, with tax on UK profits instead being paid in other jurisdictions that offer lower rates of corporation tax.

The announcement that Facebook will be paying more UK tax follows not long after another company that has used similar tactics, Google, attracted fresh controversy. The search specialist reached a deal with the UK government which saw it continue to pay very low effective rates of corporation tax, leading some to accuse the government of offering “mates’ rates.”

Facebook was diverting profits for advertising revenue generated from sales to many of its biggest advertisers through Ireland, a jurisdiction also favoured by many companies using similar tactics such as Google. This included revenue generated through advertising for large-scale businesses such as Sainsbury’s, Tesco, WPP – a major advertising specialist – and Unilever.

Advertising sales from smaller businesses will still be routed through the company’s international headquarters in Ireland when advertising is booked online without significant involvement from Facebook staff. However, the decision to cease this practice with regard to the bigger advertisers will see the full rate of UK corporation tax paid on the majority of the company’s UK profits. The resultant increase in the company’s tax bill for its UK operations is expected to reach into the millions.

Facebook is one of a number of multinational companies to attract criticism for avoiding UK tax on its earnings. Facebook is a multi-billion pound company, usually taking only around three months to generate in excess of £1 billion in profit. While it is not known exactly how much of this comes from UK revenue, it is known that the UK is one of the company’s biggest markets. In spite of this, it was revealed late last year that Facebook’s total corporation tax bill for 2014 came to just £4,327.

The changes to Facebook’s tax structure will take effect in April as the new tax year begins. As a result, the company’s first tax bill under the new arrangement will be payable next year.

Surge in Buy-to-Let Lending

To LetFigures recently show a significant surge in buy-to-let lending in the late stages of 2015. Mortgages granted to buyers of residential investment properties in November were up by more than a third compared to the same time in 2014.

Buy-to-let lending in November was down 6% on the previous month, but still up by 35% on November of the previous year, compared to 9.3% for the mortgage market as a whole. In total, 23,300 loans were granted to fund buy-to-let investment. This may come as a surprise to many, given the number of tax reforms announced last summer that will constitute a crackdown on the buy-to-let sector over the next few years.

In the July budget, George Osborne announced a number of measures and changes affecting the way second homes and property investments are taxed. These were designed to tackle what the government perceives as a property market that favours landlords over owner-occupiers. The changes, due to be rolled out in stages and should be fully in force by 2020, will severely impact the profitability of buy-to-let for many investors, primarily those who are higher rate taxpayers, and could leave some with unprofitable or even loss-making properties. Naturally, this led to predictions that existing landlords may cease buying additional properties, and that both established investors and would-be new landlords will be put off of making further investment purchases.

The fact that the number of buy-to-let loans advanced in November showed such a significant year-on-year increase seems at first to run contrary to such predictions. However, the rise in activity may be partially a result of the changes. A separate, more recent measure announced is an imminent increase in stamp duty on second home purchases. Investors who fall outside the scope of the other reforms or who have a strategy to weather them may be rushing to get purchases completed before this takes effect.

Perhaps more significantly, it is reported that the larger part of buy-to-let lending activity is made up of landlords remortgaging properties they already hold. This could be a direct response to one of the biggest and most impactful of the impending reforms. For many landlords, the most costly tax change due to be rolled out is the loss of mortgage interest relief. In order to reduce the impact of such a change, many landlords are looking to take out new mortgages, taking advantage of continued low rates and locking themselves into such a rate for a longer period in order to keep their mortgage as manageable as possible.

Insurance Tax Rising: The Impact on Consumers

InsuranceIn his July budget, George Osborne announced that the tax paid on insurance products (Insurance Premium Tax or IPT) is to rise by more than half. This will take effect in November of this year. But how significant is this change going to be at the consumer level?

The change will certainly be a noticeable one. Both vehicle and home insurance premiums will increase as a result of the higher level of tax. However, fortunately the impact on consumers is not likely to be bank-breaking. Currently, tax only adds 6% to the pre-tax value of a premium, so it only represents a fairly small portion of the total that people pay. Only this modest tax portion is experiencing an increase, rising to 9.5% of the premium’s pre-tax cost. The increase to the amount that consumers pay will therefore be noticeable, but not massive.

As IPT, like the vast majority of taxes, is charged as a percentage of the total, those who already pay higher premiums will be worst-hit. The larger the pre-tax premium, the greater the value that will be added to it by tax. The single worst-hit group is likely to be young, newly-qualified drivers who can find that their first insurance premium comes to well over £1,000. The average newly-qualified, 17-year-old driver pays £1,869 for their first year of cover, according to the Watson Car Insurance Price Index, and the tax increase would add an extra £60 to this figure.

The average comprehensive car insurance premium across the board, according to the same index, is £600. A premium of this value will increase by £20 after the higher rate of IPT takes effect.

The reason for the increase in IPT, Osborne claimed while delivering his budget, is to bring the amount levied on insurance premiums closer to the levels charged in the world’s other major economies. Britain’s current, outgoing IPT rate of 6% is, he claimed, “well below tax rates in many other countries.”

Many types of insurance are subject to IPT. The most common products on which this tax is charged are vehicle insurance policies and home insurance, including contents insurance. Other kinds of insurance, such as many kinds of health insurance and all standard life insurance products, are exempt from this tax and should therefore be unaffected by the changes.

Still other types of insurance are subject to different rates of tax instead of IPT. Travel insurance, for example, is subject to a different tax charged at 20% of the policy’s pre-tax value. This should also theoretically be unaffected by the changes, as only IPT is being increased.

A Quick Guide to Apple Pay

Apple Pay, a new payment solution from the tech giant behind the iPhone and iPad, has just launched. However, not everyone can use it and a lot of people simply aren’t sure exactly what it is or how it works. Here’s a quick guide to the essentials of Apple Pay:

What is Apple Pay?

Apple Pay is essentially a way of using your Apple device (phone, tablet or watch) in place of your physical card at participating retailers and on London’s transport network. Your card details are stored on the device, and payments made through Apple Pay will be charged to that card even if you don’t have it with you. It’s a useful backup if you forget your card, or a way to avoid bringing both your phone and your card out with you at the same time.

To use it, you simply hold your device over a reader just as you would when using a contactless card. At the same time, either press your device’s Touch ID sensor or, in the case of the Apple Watch, double-press the side button to confirm you want to make payment. You can also use Apple Pay to quickly pay for purchases made through certain apps. Spend limits are set by stores; many have no limit, while others only accept the new service for payments of up to £20.

1Is it Secure?

As long as Apple’s security promises are upheld, Apple Pay doesn’t seem excessively risky. It works much like a contactless card, but offers extra security over that payment method as it requires a fingerprint ID.Bear in mind, though, that anybody else whose fingerprint is registered on your device, such as a family member, could potentially use Apple Pay with your device as well. It is also more secure by virtue of the fact that only Apple actually accesses your card details, instead of every retailer you make a payment to.

If your device is stolen, then hopefully the need for a fingerprint ID will stop the thief running amok with Apple Pay. At the least, it seems unlikely that it would fail to at least buy you time to take further steps. The free “Find my iPhone” service allows you to wipe a stolen device remotely, including your card details. You can also remove cards from Apple Pay by logging into iCloud or asking your card provider.

Who can use it?

Arguably the biggest problem with Apple Pay at this early stage is the fact that many common cards are not compatible. Currently, the service can accept cards from:

  • Santander
  • Nationwide
  • RBS
  • Natwest
  • MBNA
  • American Express

Cards for HSBC and First Direct will be added to the service later this month, and Halifax, Lloyds Bank and TSB are also planned to follow in the Autumn. Other cards may be added in the future, but there are currently no firm plans.

Renting Out a Property? The Financial Considerations

Although buy-to-let isn’t quite the “hot property” it was prior to the recent economic recession, there is still much interest in it. Indeed, with ever still property price rises combined with low interest rates on standard savings in the bank, many who have money to invest still see investment in property as the only way to go.


The foremost calculation in determining the profitability of a rental investment is calculating its rental yield – the amount of money that is received in rent in relation to the amount of money paid for the property. There are however, many considerations that potential and existing landlords fail to undertake which leaves them a much less clearer picture of the exact profitability of such investment. Here are some to consider:


Landlords must ensure that the property is insured correctly. The exact insured required (whether buildings, contents or both) depends on the property and its tenancy terms. This insurance can cost a few hundred pounds.

Legal Compliance:

Some legal requirements for landlords are one-off for each tenancy – such as the Tenancy Deposit Scheme. Some of the deposit schemes are free of charge for protecting the tenant’s security deposit, though many charge the landlord. Other legal requirements are ongoing, and require yearly spends on the part of the landlord, e.g. the annual Gas Safety Certificate. This must be carried out by qualified gas safe engineers and often costs around the £100 mark each time.

Property Repair and Maintenance:

There is a legal obligation under the Landlord and Tenant Act 1985 for landlords to maintain properties to a certain standard. This includes ensuring heating and boiler installations are working properly, as well the washing facilities in the property. Damage done by the tenant is not in the remit though any general repairs to the property are required and the landlord foots the bill.

Agency fees:

For those landlords who choose not to rent out and manage the property themselves, there is also the cost of using a letting agent’s services. They often charge a percentage of your annual rental income to let the property or to also manage the property and tenancy on a long-term basis too – though this is a good option to take if you can’t or don’t want to deal with managing the property yourself.

Do be careful of some agents who can charge large mark ups on contractor costs when it comes to repair or maintenance work. Also, for tenants it is very off-putting being charged re-let fees by an agent at the end of a tenancy period if they choose to continue their tenancy. Be very selective when choosing who to let your property with – research will pay off.

Empty periods:

It is best to try to keep tenants happy as high turnover rates mean properties can be left empty and therefore a loss of rental income for the landlord. Any empty periods will need to be factored into costings.

Taxes due:

Landlords must declare the income they make to HMRC, and like all types of income it is subject to tax. Certain deductions can be made from the annual income received in rent.


These were some of the additional financial details that should be considered when investing in property for the rental market.

One very large consideration financially however, which has not been looked at yet, is the long-term consideration – capital growth on the value of the property. We all know the price of property has been going up over the years, and this trend, although slowing, is set to continue for the foreseeable future.

Growth is not the same in every part of the country and varies region to region and area to area, and this growth, long-term, is key to property investment being so in demand. Researching and choosing an area carefully will pay off in the long-run. Castle Estates (South London), have noted, for example, that although an area like Wandsworth now has a lower rental yield of around 5% compared to the 7-8% it was 5 years prior (steeply rising property prices do affect the rental yield calculation), the planned development around the Ram Brewery area of Wandsworth Center which includes improved transport links mean that not only is there likely to be long-term tenant demand, but also continued capital gain on property value for that area.

Research and knowledge will ensure better informed choices, though it cannot be denied that for all the costs, property generally is still a lucrative business for landlords, and will probably continue to be so.

“Deceptive” PayPal to Pay Over £16 Million Compensation

Prominent online payment system PayPal has agreed to pay compensation to customers worth a total of US$25 million (£16.1 million). The payment processing giant has received these penalties in the US for deception of customers.

PayPal, which has long been owned by eBay but recently became a separate company, agreed to make the compensation payments in order to settle the legal dispute at hand, but has not admitted to being at fault. The agreement must receive the approval of a judge before it is made legally binding.

According to a US government watchdog, the company is guilty of a number of offences including failing to properly handle disputes over bills. Most prominently, PayPal has been condemned for adding new members to a credit scheme, which is functionally similar to a credit card, without informing them that they were being signed up to this service.

The scheme in question is called PayPal Credit. It is a method of deferred payment, allowing people to pay for things within their available credit limit rather than with actual money and then repay over the following months, with interest charged monthly. In other words, it works very much like a credit card. However, it is exclusively available as a funding source for PayPal payments and therefore has no need of a physical card.

The accusation is that the company made signing up for PayPal Credit as well as for the standard payment processing service the default option for newly-joining members, and failed to make it clear that they were doing so.

As a result, according to US Consumer Financial Protection Bureau director Richard Cordray, “Tens of thousands of consumers who were attempting to enrol in a regular PayPal account or make an online purchase were signed up for the credit product without realising it.” Cordray went on to claim that many customers only found out that they had been signed up for Paypal Credit after being charged fees for late repayment or even receiving calls from debt collectors.

While the issue surrounding PayPal Credit has perhaps been the most prominent part of this case, it is certainly not the only accusation levelled at the company. Other wrongful practices of which PayPal has been accused include failing to properly post payments, mishandling customer disputes both with merchants and with the payment processing company itself, and failing to make good on advertised promises to provide credit towards purchases.

A statement from the company said that “PayPal Credit takes consumer protection very seriously,” and that “Our focus is on ease of use, clarity and providing high-quality products that are useful to consumers and are in compliance with applicable laws.”

UK customers, the company insists, have not been affected by the problems taking place in the US.


Mortgage Lending Slow in Early 2015

According to trade body the Council of Mortgage Lenders (CML), mortgage lending has been slow through the first quarter of the year. The CML described the sector as suffering from a “sluggish start” to 2015, but says that things have picked up over the last few weeks.

Gross figures for mortgage lending in Q1 2015 were down 12% compared to the previous quarter. Lending in the first quarter of this year was also down compared to the same three months in 2014, showing a 3% decrease year-on-year. Overall, the first three months of the year saw a total of £44.9 billion lent to home buyers, according to the CML’s figures.

This could be partly down to the introduction of stricter affordability checks, to which would-be borrowers are subject before qualifying for a mortgage. These rules have now been in force for a year and more recently have also been applied to buy-to-let mortgage. They require mortgage lenders to make a close, highly-detailed study of the income and outgoings of potential borrowers before granting credit, and according to the National Association of Estate Agents (NAEA), this is slowing down the process of buying a home significantly.

Mark Hayward, NAEA managing director, said: “A drop in the number of buyers is the direct result of a slow-down in acceptance of mortgages, with it now taking an average of 50 days to receive a mortgage offer.” The new rules also, Hayward said, increases the risk of sales failing to go through.

However, the CML’s figures show that things have been picking up after the “sluggish start” at the beginning of the year – even within the space of the first quarter. Lending was significantly higher in March than in February, and indeed March was a fairly strong month for the mortgage lending sector. With a total of £16.5 billion lent in the form of home loans across the month, March saw fully 21% more lending for mortgages than February. While the quarter as a whole may have seen lending fall compared to the same period last year, March this year saw an increase of 7% compared to March 2014.

According to the CML’s chief economist Bob Pannell, “the underlying lending picture is stabilising.”

“Sentiment and activity,” he continued, “are showing early signs of improvement, and should be further supported by the effects of stamp duty reform. We expect to see lending strengthen over the next few months.”

Over the past few weeks, mortgage lenders have been reducing their rates, and the resulting cheaper mortgages may have helped stimulate the recent upturn in activity.


Inflation Stalls in February

Official figures have revealed that February saw UK inflation come to a complete standstill. Last month, the overall inflation rate dropped to 0%, marking the first time since records began that inflation in the UK stood completely still.

In January, inflation had progressed 0.3% compared to the same period in 2014. However, in February the year-on-year inflation rate had fallen to zero, leaving inflation at a net standstill compared to a year ago. The drop to zero was facilitated by price changes in a number of key sectors, including furniture and furnishings, food, and recreational products.

The Consumer Prices Index (CPI), which tracks inflation, has kept records since 1988. In the 27 years since the CPI began, this is the first time that the UK inflation rate has been shown to have dropped to zero and remained unchanged overall across a one year period.

The difference between January’s 0.3% figure and February’s 0% was also much more stark than most forecasters expected. The majority of experts predicted a drop in the region of just 0.1%. The actual fall in the inflation rate exceeded this estimate three times over.

An alternative measure of inflation, the Retail Prices Index (RPI), saw the UK inflation rate drop from 1.1% in January to just 1% in February. The RPI, which almost always gives a higher inflation figure than the CPI, works in essentially the same way as its counterpart but with some key differences. Both examine a set variety of goods, compare their prices at present to their cost one year ago, and use the difference to work out the rate of inflation. However, the CPI essentially looks at the cost of retail goods rather than household costs. The RPI includes things like council tax, rental rates, and mortgage repayments which are not used by the CPI, and this is why the figures are usually different.

According to the CBI, a prominent business lobby group, the effect of the inflation standstill is not likely to be a significant reduction in the cost of living. The group’s director of economics, Rain Newton-Smith, said “Despite inflation dropping to zero, it is unlikely we will see falling prices for a prolonged period, particularly as the pressure from lower oil prices fades.”

However, Newton-Smith noted that there were some decided consequences to this development. In particular, he said, “With the Monetary Policy Committee still alert to the risk of very low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

UK Sees Falling Unemployment and Rising Wages

The UK economy is benefitting from a continued trend of falling unemployment as well growth in wages. Unemployment has dropped to 1.86 million, while wage growth is ahead of inflation by the biggest margin in nearly five years.

In the three months to December 2014, the number of unemployed in the UK fell by 97,000. According to the Office for National Statistics, this places the unemployment rate at 5.7% of the country’s current working population.

Long-term unemployment – those who have been out of work for a year or more – fell by 210,000. The UK is now home to approximately 638,000 people who are classed  as long-term unemployed.

The total employment rate for those aged 16-64 in the three months to December reached 73.2% This is a record high, tied with the three month period from December 2004-February 2005 when employment rates reached exactly the same level. Together, these periods jointly represent the highest level of employment since records first began to be kept in 1971. Overall this means that, during the final three months of last year, the UK population included 30.9 million people in work. Compared to the same time a year earlier, this is an increase of 608,000.

Unemployment for the 16-24 age group, however, remained unchanged compared to the previous quarter. This figure remained at its existing level of 16.2%.

While overall employment has risen, self-employment has fallen over this three month period. Overall, the quarter saw the number of people working for themselves in the UK fall by 19,000. There are now around 4.4 million self-employed individuals.

The same three months saw average earnings up by 2.1% compared to the same period a year before when bonuses are included. If the figure is recalculated without taking bonuses into account, wages for the quarter were up by 1.7% year-on-year. In the month of December alone, wages were up 2.4% compared to the same time in 2013. This is the furthest ahead of inflation that average wages have been since March 2010.

Inflation, meanwhile, stood at 0.5% in December. The most recent data, released this week, shows that January saw inflation fall to a mere 0.3%. This is the lowest level of inflation seen since records began.

The pound has risen in value against other major currencies, and in particular has reached a seven-year high against the Euro. The strength of the labour market, with rising employment and wages, is believed to be a significant factor contributing to the strengthening of the pound.