UK tax competitiveness: Haven can't wait

Dispute over the competitiveness of the UK’s corporate tax system is never far from the thoughts of the business world, but the debate has reached new heights recently with some of the UK’s largest companies sticking their heads above the parapet and standing up to the power of the Treasury.

Common among the grumbles of UK plc are the increasing complexity of the tax system (and the associated compliance demands) and the actual rate of corporation tax, which many companies claim comes in well above the headline rate of 30%.

This year’s Finance Act, for example, ran to 517 pages while Gordon Brown’s aggressive moves to combat abusive tax avoidance, and the disclosure regime that forms part of that, have piled yet more demands on the tax departments of British companies.

And while the headline rate of corporation tax has been cut from 33% in 1997 to 30% today, this tells only half the story. An increase in National Insurance contributions combined with various other obscure business taxes have increased the gross tax that companies must pay.

Tesco, the UK’s largest retailer, says that as much as 50% of its profits go to the government in taxes of one form or another. “We have a large and rising tax burden,” Lucy Neville-Rolfe, the retailer’s company secretary told the Daily Telegraph. “Yes, the corporate tax rate was lowered, but business rates have risen sharply and so has National Insurance. There is also much more uncertainty about the tax system.” This is backed up by research carried out by Grant Thornton. The accountancy firm expects corporation tax revenues to represent 11.4% of all tax receipts in 2006/07, compared to just 8.2% in 2003/04.

Tax poachers

As a result, UK-domiciled companies are suffering something of a double whammy. On the one side, taxes are slowly creeping up through the back door while, on the other, complexity and compliance demands have also increased. The result is to create an environment where UK companies are seriously considering their options and deciding whether or not to remain as UK-domiciled companies.

Last year, Chris Spooner, the group head of financial planning and tax at HSBC said, very publicly, that the bank would think nothing of quitting the UK because of its uncompetitive tax system. “A number of low tax jurisdictions have approached us,” he told a Chartered Institute of Taxation conference. “There has been nothing tempting yet, but we have moved headquarters before and we are not scared to do so again. The UK used to be a good place to be for purely tax reasons. I am not sure if that is the case anymore.” Analysis of HSBC’s 2005 annual report goes some way to explain why the bank feels aggrieved with the tax treatment it receives on these shores.

Its total UK corporation tax charge was $663m (£337m) out of a global charge of $4,685m. However, the bank calculated the overall tax charge which would have applied if all profits had been taxed at the UK rate. The result? An increase of more than $400m to $5,093m.

There are several things about HSBC’s statement that the Treasury should be concerned about. First, the fact that one of the UK’s prize corporate assets would not for a moment baulk at a move abroad; and, second, that countries are actively approaching companies domiciled in other jurisdictions to try and attract their investment. But Spooner had more to come, and what he said next had a cold inevitability that would have had Treasury officials squirming. “HSBC pays a large amount of tax and we are the ones who decide who gets it,” he said.

“We take the competitive environment seriously and there are others like us.” Of this there is no doubt. In November 2006 Hiscox shareholders approved a proposed corporate reorganisation that would see the insurance group relocate to Bermuda. “Many of the group’s principal competitors already enjoy the substantial potential tax benefits that would become available to Hiscox Ltd and…this scheme should improve the prospects for the group’s share price,” a Hiscox statement said at the time.

Bermuda beckons

And Hiscox wasn’t alone. As the statement said, many of its competitors were already benefiting from the more competitive tax treatment that was on offer outside of the UK, including Caplin which left these shores to operate out of Bermuda in 2002.

The boards of most multinational companies would admit to considering their domicile from time to time – it is part and parcel of running a business.

Aidan Smith, the finance director of FTSE-100 property group Liberty International, is a case in point. He says the company carried out a major reorganisation in the late-nineties and that a location change was not out of the question. In fact, if it weren’t for the newly introduced Reits (real estate investment trusts) regime Liberty may well have thought about moving offshore by now.

“I think if you were starting, if I was starting with a clean sheet, in the absence of Reits I wouldn’t have necessarily chosen London,” he says.

“The only mistake you can make in the UK, as far as tax is concerned, is to be born here. Because if you’re born here, you’re taxed on everything. If you come here from abroad, it seems that the Revenue is much more lenient.”

Regulation and complexity

But perhaps even more of an issue than the overall tax charge that UK-domiciled companies face is the stifling effect of tax regulation and complexity. A report conducted by theWorld Bank in association with PricewaterhouseCoopers illustrates the problem well. The research looked into the number of pages of primary tax legislation that each of the leading 20 economies have. The UK was the second worst with 8,300 pages, after India with 9,000. Looking at the UK’s closest competitors, however, was revealing. The US significantly improves on the UK with 5,100 pages, whereas Germany (1,700), France (1,300) and the Netherlands (1,640) positively leave us in their wake.

A report carried out by KPMG highlighted yet more areas for concern over the country’s tax system. Threequarters of respondents to its survey claimed that the UK tax environment has become more complex over the last five years, with fully 84% of large businesses thinking this to be the case. Perhaps it should be no surprise, then, that the research also found the average tax department was spending 56% of its time on compliance-related activities.

Business friendly

John Whiting, a tax partner at PwC, says that while we are not at a stage where a steady flow of UK companies are going to up-sticks and move abroad, “the extra bit, the jam, the investment, might go somewhere else.” In the government’s defence, last November it published the 2006 Review of Links with Large Business – an attempt to offer a late olive branch to corporate Britain. The report was compiled by former chairman of HMRC Sir David Varney and lays out eight proposals that the department should address to deliver four key outcomes that both HMRC and businesses want to see.

The outcomes were:
• Greater certainty;
• An efficient risk-based approach to dealing with tax matters;
• Speedy resolution of issues; and
• Clarity through effective consultation and dialogue.

The proposals certainly make sense: a system of advanced rulings, so that companies have greater certainty about the tax implications of significant investments and corporate restructures, and a transfer pricing enquiry system which will see matters settled within 18 months, are just two of the proposals.

Perhaps most interesting, however, was the statement that, effective from Budget 2007, “HMRC will be accountable for taking the business perspective into consideration in everything it does from implementing policy decisions to designing systems and processes. A consistent approach to informal and formal consultation with clear accountabilities and parameters will ensure the business perspective is taken into account as the norm, so contributing to a more certain administrative framework within which business can thrive.” While it’s gratifying to see the UK government tackle this issue head on, some would argue that it’s too little too late. Other economies have overtaken the UK in terms of being attractive places to do business: and in this sense, the tax environment is extremely important – certainly more so than it used to be.

Cost control

“Tax has become more important, possibly because it’s now being seen as an area for cost control,” says Whiting. “Other countries have latched onto it as an area for competitive advantage.” And if companies continue to experience the kind of complexity and expense associated with the UK tax system, it won’t be long until that competitive advantage is enough to tempt more than just a handful of UK-domiciled countries to foreign shores.

The FDs’ take

A survey of 87 FTSE- 350 finance directors, conducted by Ipsos Mori on behalf of the Confederation of British Industry, had some interesting findings:

• Twice as many respondents said that other EU member states’ tax regimes were preferable to the UK’s. And more than 70% said that the UK’s tax regime has become worse over the last five years – compared to 7% who said it had improved. It wasn’t all bad news, however, with twice as many saying that the UK’s tax regime was better than that of the US.

• When asked whether they had relocated or whether they were considering doing so, 61% said not, while 39% said they had either relocated or were considering doing so.

• And, worryingly for the taxman, of these, 38% said that tax matters were very important to these deliberations and 56% said they were slightly important.

Where’s better?

Research by the CBI asked finance directors what things they found particularly attractive about other tax regimes.

Below are a few of their responses:

• “The attitude to tax such as in the Netherlands. It’s the approach to companies, a welcoming approach. They want companies.”

• “Transfer pricing such as the Netherlands and Ireland. Better controlled foreign company regimes such as USA and Canada."

• “Our system is particularly complex, so somewhere like Ireland where there is less statutory regulations would be better.”

• “Eire. Low tax rate, ability to get advance rulings, a system that is straightforward and not complicated, and an ability to have a sensible dialogue and low compliance burden.”

• “The Dutch participation exemption. The Irish financial services regimes. The flat tax such as in Eastern European countries from a corporation tax level, not income tax.”

• “Low tax rates and no CFC rules such as in Ireland. Better international taxations such as in the Netherlands.”

• “Eire. Competitive, the rate is low and they understand the needs of businesses.”

• When asked which domicile outside of the UK they would choose for tax reasons, 61% said either Ireland or the Netherlands.