There is one point on which the coalition government has been clear. It has been busy setting policies it thinks will make the UK a more competitive place to do business. But in turn, Messrs Osborne and Cameron (and, lest we forget, their Liberal Democrat colleagues Nick Clegg and Vince Cable) expect the private sector to do the investing and pushing for a sustainable economic recovery – while they focus on erasing the £81bn fiscal hole in the country’s finances within the life of the current Parliament. Tentatively upbeat is the overriding sense finance directors say they have a year into the Conservative-Liberal Democrat government: but within that, great uncertainty keeps all on their toes.
The headline measure in March’s Budget was a two percent cut in the rate of corporation tax to 26 percent, rather than the trailed one percent, and a commitment to cut it annually by one percent to 23 percent by 2014-15. Bill Dodwell, head of tax policy at Deloitte, believes it will fall even further.
“The endgame will be 20 percent as 23 percent seems an odd figure to end up at,” he says. In the short term, Dodwell says, the cut will have a direct impact on profits and balance sheets.
Ted Baker, the fashion clothes retailer, says the impact of the extra percentage point cut will be to reduce its tax burden.
“We expect to see a future reduction in our effective rate in line with these changes,” says finance director Lindsay Page.
More significantly, the spotlight is on companies that moved their tax residency abroad to improve the treatment of profits. Osborne’s reform of rules governing multinationals’ foreign profits saw him announce an “ultra-competitive” 5.75 percent rate on overseas financing income as part of reforms aimed at making the UK “the place international businesses go to, not the place they leave”.
Leading the potential homecoming charge is advertising giant WPP – whose chief executive Sir Martin Sorrell only took 24 hours after the Budget to say that he may well move his business back – while another Irish redomicile, United Business Media (UBM), may follow.
“Once we have reviewed in full the details of the proposed changes to the corporate tax regime, UBM’s board will consider the issue,” says the company’s FD Robert Gray.
Plumbers merchant Wolseley, domiciled in Switzerland, is more cautious. Its FD John Martin says the move reduced its effective tax rate from 34 percent to 30 percent en route to 27 percent next year.
“We took the decision on the basis of the economics, clarity and simplicity of our tax base,” he says. “If in the future those factors change, we will look properly at that time.”
Regarding companies in the UK that were considering leaving for sunnier, cheaper climes, Richard Baron, head of tax at the Institute of Directors (IoD) believes there will be “a certain amount of tide turning that is not visible – someone who was thinking about leaving but no longer does anything about it”.
Anyway, it is unclear if changing the rate will improve the UK business landscape and bring some money in.
“These homecomings mean absolutely nothing for the chancellor’s desire to encourage real growth,” Jaimie Kaffash, a tax reporter for Accountancy Age, tells Financial Director. “No jobs were transferred when these companies moved their tax base, and none will be coming back. It’s hardly a huge boost to the Treasury’s coffers.”
And it may not attract fresh foreign capital, either.
“Manufacturers that actually create jobs and generate significant revenue are not put off Germany because of its higher corporation tax rate,” he adds. “Tax is a secondary consideration behind commercial factors such as infrastructure, land and workforce: things that will suffer due to cuts in spending.”
John Mauchline, director of finance at Crieff Hydro, an £18m-turnover family hotel and resort in Perthshire, says the tax cuts are offset by other measures.
Gone is the hotel buildings allowance that allowed him to charge four percent of the value, excluding land, against profits every year for 25 years.
“I can’t allow anything on buildings against profits. In the hotel industry we spend quite a lot on our buildings,” he says. “We will ultimately pay more tax.”
Help for SMEs
Government measures to support small business have come in thick and fast. More than four in every 10 IoD members say the increase in the lifetime limit for entrepreneurs’ relief from £5m to £10m, for example, will be positive for them. Almost half say the improvement to capital allowances for short-life assets will be favourable.
Deloitte’s Dodwell says the new rule allowing companies to write off tax on assets with a life of eight years or less will encourage investment in machinery that uses high-tech equipment. And plans to provide £250m to help first-time buyers through the FirstBuy Direct shared-equity scheme has pleased housebuilders hit by the property slump.
Alistair Leitch, finance director at Bellway, welcomes it even if he also thinks it a “short-term fix” rather than a long-term solution. Proposals to streamline the planning approval system and put up public land for auction to make more available for development are good news, though the fine print is outstanding.
“The early noises sound good, but we will see how they come into play,” Leitch adds.
The IoD’s Baron says long-term proposal floated in the Budget to merge the income tax and national insurance would greatly benefit SMEs.
“If they get that right, [businesses] may make really significant savings in administrative costs,” he says. “So many members think it completely stupid to have two things that are effectively income tax, but one is called national insurance.”
Matt Wallace, financial controller at Adsensa, a £3m-turnover software business in Newbury, says simplifying those payroll taxes would cut his administrative costs, which is a big help for a growing business.
Crieff Hydro’s Mauchline says the VAT and rise in fuel prices are starting to have an impact.
“As the public sector cuts kick in, it is going to get trickier,” he says. “We do a lot of business with the public sector. We will carry on investing in our product but will be more cautious about new ventures.”
But FDs do not think a few positive moves are enough to offset tax hikes such as the VAT rise to 20 percent, and the impact of spending cuts on jobs and consumer spending – which will affect them for years to come. The Chartered Institute of Management Accountants says 38 percent of its members expect the UK to slip back into recession this year and one-third have lost revenue as a direct result of public sector spending cuts. And it is those background facts that mean business continues to carry the can.
The biggest threat of turmoil relates to uncertainties over the US November elections. The markets will have to seriously consider the possibility of Donald Trump being elected
As the British government starts the complex process of considering the form of the UK’s post-Brexit relationship with the European Union (EU), one issue will be foremost in the minds of exporters – tariffs
Anthony Harrington examines the actions trustees and sponsors of defined benifit pension schemes should take in response to Brexit
The abrupt swing - from gloom and despondency after the Brexit result became known, to a mood of complacency now - is premature and deceptive, writes David Kern