With the worst of the recession now over, companies are no longer focused on survival and finance directors are returning to the matter of managing their tax rate. The decision by Wolseley, the world’s largest plumbing and heating products supplier, to move its tax domicile to Switzerland has put the issue of moving to more favourable tax regimes firmly back on FDs agendas.
In the latter stages of the previous Labour government, corporate relocations became a serious headache, with rows over corporation tax and the treatment of taxation of earnings from foreign subsidiaries spilling into open warfare.
In September 2008, WPP, the world’s second-largest marketing services group, followed the lead of a host of other UK businesses and announced plans to move its tax domicile to Ireland. Earlier that year, drugmaker Shire and media group United Business Media decided to shift their tax domiciles from the UK to Ireland because of planned tax changes on foreign earnings.
Then the rot seemed to stop. Then-prime minister Gordon Brown offered concessions on the taxation of foreign profits, a major bugbear for many companies, while the near-term challenges of the financial crisis came to dominate FDs’ minds, pushing tax down the agenda.
However, despite a number of further concessions and promising noises coming from chancellor George Osborne, the spectre of an exodus of UK companies to more tax-friendly climes has risen once more. According to a report commissioned by HM Revenue & Customs, released in August, one in five businesses have considered relocating abroad for tax reasons.
This has been backed up by action. In September, Wolseley revealed plans to create a new holding company in Jersey that will have a tax residence in Switzerland. The company, which trades in 25 countries and generates 81 percent of its revenue from outside of the UK, cited tax as the dominating factor behind the move.
Wolseley said it expects its tax rate to come down to 28 percent from 34 percent, as a result of the move, with its finance director John Martin adding that if the company had already been domiciled in Switzerland, it would have saved £23m in the year ending 31 July. The promise of such savings is likely to raise fears that others could follow suit.
The main criticism being voiced by Wolseley is of the UKs’ onerous tax treatment of profits generated by controlled foreign companies (CFCs) tax. Under the rules, UK-domiciled companies are subject to a charge on tax on the income of low-tax, foreign-controlled companies of which they are shareholders.
As an example from the Association of British Insurers, a UK company with an Irish branch will pay 12.5 percent Irish corporation tax on the profits made by the branch in Ireland and then 15.5 percent UK corporation tax on the same profits.
However, the move by Wolseley, which will cost the company £6m in implementation costs, brought a stinging rebuke from Richard Murphy of Taxation Research.
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“No one on earth can think this structure anything but artificial,” Murphy said. “And that alone means that this, and other such moves, says the time to act on corporate residence has arrived. The nonsensical UK approach that the location of board meetings determines the residence of a company is an anachronism from the age of the steamship and telegrams. It is in urgent and obvious need of updating so that corporate residence reflects economic reality – not a silly game that boards of directors can play.”
Wolseley’s departure must feel like a slap in the face for Osborne, who has reiterated that “Britain is open for business” to allay fears that the UK’s tax regime was harming its competitive position compared to other tax domiciles.
In the emergency June budget, the chancellor pledged to cut the rate of corporation tax to 24 percent from 28 percent over the next four years, reform the complex CFC rules that have driven business away from the UK, and reduce
the red tape of regulation and establish an Office for Tax Simplification.
“You have a position where corporates have been saying for some time that the UK tax regime is unattractive,” says John Whiting, tax policy director at the Chartered Institute of Taxation. “Almost more important is the uncertainty around the tax regime, rather than the tax rate.
“Something has to be done. That has been recognised and things have begun
to change. [The move by Wolseley] demonstrates that companies have this
on their agenda more than they used to. It will stiffen the government’s resolve to change.”
While the positive noises coming from the government about making the taxation of foreign branches and subsidiaries broadly equivalent has been welcomed, there has been some consternation that a final decision on how to make the rules surrounding CFCs more competitive has been delayed until 2012.
For Wolseley at least, change is not happening fast enough. Ian Meakins, the company’s CEO, has hinted the company may return if there is a wholesale change to the legislative framework, but Martin is cautious, pointing out that the timetable for change is sketchy and no assurances have been made about specific changes.
Murphy agrees that any real progress has been painfully slow.
“It has taken too long to get in place and has not been to the credit of HMRC,” he says. “I think HMRC could have made faster progress, but it is not all their fault. If businesses want progress they have to work for it too.”
Although any change to the current rules on the taxation of CFCs will serve to make the UK a more attractive domicile for FDs, Murphy is quick to point out that much of the doom-mongering about the state of the UK’s tax regime is unfair.
“A great deal is happening in the tax environment for businesses that is good, but we don’t hear about it. We get a biased view. All the stuff about the UK being uncompetitive is a load of rubbish,” he says. “Just because a loss-making company in the UK has left doesn’t mean others should follow suit. Some of those winners from the tax regime should stand up and say they are getting the best deal they can.”