The companies that left the UK for more tax-friendly climes seem to have been seduced by the Budget. Relaxed controlled foreign companies legislation and a lowering of the corporation tax rate saw WPP, UBM and Shire hint that they would be heading back to London for tax purposes from their current Irish boltholes – less than 24 hours after George Osborne announced the measures.
Any such expressions will clearly be welcomed by Osborne, who needs the world to believe in the credibility of his plans for upping UK competitiveness and dynamism. But in themselves, these homecomings mean absolutely nothing for the chancellor’s desire to encourage real growth. No jobs were transferred when these companies moved their tax base, and none will be coming back. Even the tax take is minimal, if any; changes in the Budget mean that UK companies returning home will get the same three-year period of grace they enjoyed previously to get their heads around the CFC legislation that is enjoyed by foreign companies. After the three years are up, they will be subject to the very favourable 5.75 percent effective UK tax rate for foreign financing companies – hardly a huge boost to the Treasury’s coffers.
The hope is that by bringing back their tax base, these companies will be more likely to invest in the UK. This is a gamble. And a big gamble at that, costing £6.7bn over four years. But for all the talk of bringing in a competitive tax regime, we need to stop and ask what kind of business we are trying to attract to the UK. It should be quality over quantity: not a mass retro-emigration of our biggest names, but, to be really effective as a growth tool for the UK, those companies need to be able to inject investment and jobs on their own merit. If WPP took no jobs with it to Ireland, and will bring none back or need to create any, isn’t this measure as fiscally neutral as most observers said the Budget speech was overall?
It is enlightening that the countries we are apparently losing out to are the likes of the Netherlands, Ireland and Luxembourg. They are all worthy countries, but hardly economic powerhouses. Even at 28 percent – a supposed uncompetitive rate – the UK still already had the lowest rate among G7 members. But the vital industries – the manufacturers that actually create jobs and generate significant revenue – are not put off Germany, for example, because of its higher corporation tax rate. Tax is a secondary consideration, way behind the commercial factors such as infrastructure, land and workforce. Things that will suffer due to cuts in spending.
The industries with the flexibility to base decisions on tax implications are, despite changing taxation, unlikely to add much to the UK economy. Attracting the big manufacturers, whether they be car makers, soft drinks companies or (even better) environmentally friendly energy providers, should be the measure of this government. But many say that dream is from a far bygone era for the UK. And on what terms aside from taxation can we really compete for such businesses?
If companies such as those mentioned above upped sticks to follow a cheaper rate, and can simply pack up and come home the second we cut our rate, might they be liable to rinse and repeat on the three-year payment holiday when some other jurisdiction undercuts us? In which case, if they bring no new jobs or growth to the UK, and then decamp, where does that leave Osborne’s agenda? Are they simply tax tourists hustling for rates?
The chancellor can only claim success when the big businesses cite tax as a reason for choosing the UK. But this is highly unlikely to happen.
Jaimie Kaffash is tax reporter for Accountancy Age. Read his analysis of the Budget’s tax rule changes here