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Taxing it to the competition: How tax competitive the UK really is

Britain has the most competitive corporation tax regime in the G20. But is it so attractive when other forms of taxation are increasing? asks Calum Fuller

23 Apr 2013

By Calum Fuller

George Osborne as a stall keeper

THE GOVERNMENT has been caught up in a contradiction in its attitude to business over the last 18 months or so. On the one hand, the chancellor and his colleagues in the cabinet, at the Treasury and the Bank of England are keen to stress that Britain is “open for business” with the “most competitive” tax regime in the G20. On the other hand, there’s the equally vehement rhetoric about tax avoidance.

As if to reinforce his point, George Osborne cut corporation tax by a further percentage point to 20% and introduced a variety of reliefs for SMEs and the creative industries in March’s Budget. Significant progress has also been made with the introduction of revised controlled foreign company rules, tax breaks for R&D investments, and the patent box, which allows companies to pay a 10% rate on profits made from patented products.

Such changes are designed to encourage foreign direct investment in the UK and encourage economic growth. Yet the government’s stance on tax avoidance, which has not simply included attacking the more egregious schemes, has sighted companies – particularly multinationals – well within the government’s crosshairs.

Most notably, Amazon, Starbucks and Google attracted the ire of both politicians and the public after it emerged they were using their presence in other jurisdictions to drive down their tax bills to the collective tune of £900m. In the main, the companies used transfer pricing – where the corporations’ value goods and services move across international borders from one corporate entity to another – to achieve lower marginal rates.

2012 taxes borne by percentageThe practice has drawn stinging criticism from MPs, particularly the Public Accounts Committee – chaired by Labour MP Margaret Hodge – which branded the multinationals “immoral” and described the aforementioned trio’s appearance before the committee as “an opportunity to explain why they don’t pay proper levels of tax in the UK” – though she did neglect to explain what a “proper” level of tax is.

David Cameron, too, said he was “not happy with the situation” – so much so that he later somewhat blurred the lines between avoidance and evasion during his February tour of India.

“I think the problem with that [distinguishing between avoidance and evasion] is that there are some forms of tax avoidance that have become so aggressive that I think there are moral questions we have to answer about whether we want to encourage or allow that sort of behaviour,” he commented.

Against that background, finance directors would be forgiven to playing it safe, lest they attract the unwanted attentions of HM Revenue & Customs. After all, what is an FD who is thinking of entering the British market to make of such schizophrenic attitudes?

“If you were coming into the country and looking at building a retail-type chain, your costs of doing business would have to take into account any reputational damage incurred because you wouldn’t pay tax for the first three or four years, as you’ll be making losses,” says Andrew Bonfield, finance director of the National Grid and head of the highly influential Hundred Group’s tax committee, though he stops short of suggesting the current climate is impeding major investments.

“I think the worst situation at the moment is the economic picture and whether there’s an opportunity to get growth back. That’s critical,” he says.

Friendly to business
The thorny issue of tax structures aside, Osborne’s Budget – which will be the last to affect FDs before the next general election – could be construed as being friendly to business. Along with the headline cut in corporation tax, there were a number of reliefs aimed specifically at encouraging investment in Britain’s smallest businesses.

From April 2014, businesses and charities will be given an employment allowance to take the first £2,000 off employer national insurance (NI) contributions; stamp duty on shares traded on growth markets such as AIM will be abolished. There was also an increase in the ‘above the line’ (ATL) credit for large company R&D investment to 10% from April 2013, and support for the creative industries and the natural resource sector.

According to the chancellor, 450,000 small firms will pay no job tax at all as a result of the NI change. “This represents circa 10% of the SMEs’ business population,” says Neil Sevitt, head of SME at RSM Tenon. “This measure goes beyond the pre-Budget speculations and is a major macro-economic incentive for the creation and retention of jobs, a significant part of which is created in the SME sector.”

The chancellor also announced an extension to the capital gains tax exemption under the Seed Enterprise Investment Scheme (EIS). Any investors in the scheme – which offers 50% income tax relief on investments made into small, early-stage companies – that make capital gains in 2013/14 will receive a 50% relief when they subsequently reinvest those gains into seed companies in either 2013/14 or 2014/15.

“The removal of stamp duty on trading in AIM-quoted stocks is a very significant event for the growth market – alongside the EIS ... tax breaks, it is probably one of the biggest fiscal events in the market’s history,” says Philip Secrett, partner and head of AIM and smaller listed companies at Grant Thornton.

But there’s a ‘but’. While there have been such steps made, the number of indirect taxes levied on businesses has also risen substantially over the past seven years.

Long-term tax trends graphWhile corporation tax levied on constituents of the Hundred Group – effectively the FTSE 100 – delivered £77.1bn to the public purse, amounting to about 14.2% of the total tax take, in 2012, taxes borne by businesses have risen 19% since 2005, meaning the amount they pay has remained largely stable, according to a study of the lobby group’s members conducted by PwC.

As it stands today, businesses contribute £2 towards other taxes for every £1 paid in corporation tax, something Bonfield says will be a more stable source of income for governments.

“These other taxes tend to be easier to collect and less volatile since they’re not dependent on profits,” he explains. “We’re in the middle of a well-trailed programme for reducing the rate of corporation tax while other business taxes, such as employer’s national insurance contributions and irrecoverable VAT, have risen.”

Tax profile graph In 2005, when the study started, there was £1 of other business taxes to each £1 of corporation taxes. Corporation tax payments have been volatile over the period, falling by 17% between 2005 and 2012; by contrast, the other taxes borne have increased by 58%. Adding corporation taxes and other taxes together, the increase in total taxes borne has been 19%.

Race to the bottom
Of course, it’s a sound method of encouraging businesses while exploiting more stable sources of income from the government’s perspective, and self-evidently, there’s a fine line to tread between getting sucked into the ‘race to the bottom’ and encouraging business.

According to Chas Roy-Chowdhury, head of ACCA’s tax faculty, a more “holistic” view is required – one which takes into account companies’ desire to keep costs down.

“The UK is trying to compete on corporation tax grounds and yet we don’t like it when other jurisdictions do better,” explains Roy-Chowdhury. “In some ways, it’s been a long time coming – there’s been talk of a ‘race to the bottom’ for the past 20-25 years and it’s not yet happened, but it is happening and it’s very difficult to stop it happening.”

There is no easy solution, but the move away from headline corporation tax towards taxes like VAT, NICs and PAYE is a sensible one, Chowdury adds.

Sensible it may be, but this rebalancing has left the constituents of the FTSE 100 paying a higher tax rate than in pre-recession times. According to the survey, the total tax rate – a measure of the cost of all taxes borne in relation to UK profits – was 38.7% in 2012 for participating members of the Hundred Group. The rate peaked at 64.4% in 2009 and has since declined year on year.

Nevertheless, corporation tax is still the largest tax that directly affects a company’s profits, accounting for 32.8% of all taxes borne. The second largest tax is employers’ national insurance, accounting for 25.2%, with business rates and irrecoverable VAT coming third and fourth, respectively.

During the survey period, £3.9bn was paid in business rates, a 6.3% increase on 2011, while many businesses now find themselves subject to planet, or environmental, taxes, introduced by successive governments to promote behavioural change. They include taxes and duties levied on the supply, use or consumption of goods and services considered harmful to the environment.

A complete departure
Perception of tax initiatives graphHowever, there is no sign of complete departure from the contradiction, according to Saïd Business School’s professor Michael Devereux, who argues it is something with which every chancellor has to deal.

“All governments have to face two directions simultaneously – one says, ‘We want to promote growth and investment,’ and the other is to say, ‘We want to collect tax from corporations’. Those two directions are effectively in conflict with each other, and the current government has clearly addressed the former,” he says.

The feeling among experts is that, ultimately, the government is more interested in encouraging businesses and returning Britain to growth than simply maximising the tax take. After all, what is the point in high taxes if companies are failing and unemployment is high? And, of course, it is hugely difficult for any country to affect existing tax policies in other jurisdictions, so many experts agree that the UK should make the best of what it’s got.

“There is a lot of rhetoric, but the question is how they [the government] are going to change the international tax system to say you’re going to pay more tax in the UK because they’ve identified that you’ve got money going into Luxembourg – that’s going to be very difficult to do even if they wanted to,” says Devereux.

“The biggest thing to bear in mind is that when this government came in, the corporation tax rate was 28% and when they leave, it’ll be 20%.”

And that, it seems, is the salient point. In the context of austerity, a time when the government is desperately trying to raise revenues, to make a cut that size to corporation tax is a fairly strong sign that it is determined to encourage commerce and growth.

Raising the peripheral levies, it seems, is an insurance policy.

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