Tories planning to tax Debt Laden Corporations?

The Tory party, in the shape of Shadow Chancellor George Osborne, appears to be planning to make it tougher for companies engaged in borrowing large sums of money in order to boost returns. He has said in a number of speeches recently that generally high levels of corporate debt should not be rewarded by the corporate tax system in this country.George has been quoted as saying “the UK is widely regarded as having the most generous tax treatment of debt interest of any major economy, so it was time to look again at the generosity of interest deductibility in our corporate tax system”.

One can argue about how the Tories might end up attempting to change the tax system in order to stimulate equity investment rather than debt financing, but from a credit rating perspective, any move in this direction would be welcomed. The Graydon database of companies in the UK is awash with organisations with high borrowing ratios- a characteristic that is normally frowned upon in credit rating circles- and that was even before the impact of the credit crunch! It was bound to be the case in the UK that our heavily debt-laden companies would suffer when easy money from the banks dried up in 2008- especially in situations when the companies’ business models depended on external funding.

After the election results last week, George Osborne might get his chance to put his ideas into action sooner than he thinks!

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