CHANCELLOR GEORGE OSBORNE pulled off a PR coup when WPP, the advertising firm that excels in the practice, announced it was coming home to the UK in response to measures announced in the Budget. Its chair, Sir Martin Sorrell, cited the reforms to controlled foreign companies and the reduction in corporation tax from 28% to 26%, one year early, as his reasons for recommending a move back to the UK to the board.
This was understandably welcomed by Osborne as it proved that the UK was “open for business”. But is the chancellor attracting those who will genuinely spend money in the UK or only those who will take advantage of the special offers without adding much to the coffers?
UK plc was struggling to attract or retain customers, according to the accountancy profession. The tax system and the uncompetitive corporation tax rate meant that companies were heading abroad. But, as Accountancy Age revealed, only 22 companies left the UK due to tax reasons in four years. This is a surprisingly low number.
Of course, many of these firms will be FTSE100 and FTSE250 companies - the kind of companies that, on the face of it, the UK benefits from accommodating. WPP is arguably the most high profile of these. But the wider economic benefits for the UK Exchequer from their return are unclear.
Despite moving its headquarters to Dublin, the FTSE 100 company still has a sizeable presence in London. Indeed, a WPP spokesman told Accountancy Age that
any relocation of its tax base will result in few, if any, jobs being moved. The same is true of publishing company UBM, who are also likely to move their tax base back to the UK, and pharmaceutical company Shire. As with WPP, their moves to Ireland did not affect their UK workforce numbers to any meaningful extent and a move back will have the same effect.
There is a perception issue, of course. When the likes of WPP, UBM and Shire leave the UK, it sends out a message that the UK is not an attractive place to do business. Kevin Hindley, managing director at Alvarez & Marsal says that even recently, clients were deciding against the UK for the likes of the Netherlands, Luxembourg and Ireland.
Michael Devereux, director of the Oxford University Centre for Business Taxation, says a cut in the corporation tax rate will have a positive effect on the economy. There is “plenty of econometric data” that suggests the effective tax rate does have a bearing on where businesses decide to base themselves. “It is one factor among many,” he says.
It is a tick in the box for the UK. But talk of an uncompetitive corporation tax rate might be slightly exaggerated. The UK’s corporation tax rate was the lowest in the G7, even in 2010 (see box). There are other factors – potential market size, infrastructure and the level of the workforce’s education, for example. When Ireland, a relatively small economic power even before the crash, set its corporation tax at 12%, it was a form of “window dressing” to showcase the greater benefits on offer in Dublin, tax director of the Office of Tax Simplification John Whiting told the Treasury select committee.
But it is costly window dressing. By 2015/16, the cost of lowering the rate of corporation tax to 23% in the UK will be a cumulative £4.22bn according to the Office for Budget Responsibility, hitting £1bn a year and reforms to CFC legislation
will cost £2.5bn. This is a £6.7bn gamble to attract businesses to the UK. For this money, the business must be the kind of business that will stimulate the economy and create a societal good.
The facts suggest that bringing the tax base of the likes of WPP, UBM and Shire back to the UK will not on their own provide a shot in the arm for the economy. As well as not creating jobs, the Progressive Tax Blog has pointed out that WPP will not be subject to CFC legislation for three years under the reform announced in the Budget to apply the foreign company exemption to “previously UK-headed groups if they return to the UK”.
After this point, the blogger says, the tax payable on overseas financing profits will be so low – at 5.75% – that WPP “will likely pay no UK corporation tax when combined with interest deductions in the UK”. It concludes that, at 5.75%, the government has reduced the rate even further than necessary to attract multinationals. In doing so, it has reduced its tax take across the board “meaning that every other UK multinational that had no intention of leaving the UK is ecstatic”.
Derek Allen, head of tax at ICAS, believes that the “race to the bottom” for corporation tax is in “no-one’s interest”.
Companies should base their business decisions on infrastructure and business needs. Trying to emulate companies that are internationally mobile enough to shop around for rates of taxation is “not a particularly sensible thing to do”.
For firms, the cut in corporation tax will be a boost when trying to convince potential clients to choose the UK. But for UK plc, the success of the tax cut cannot be judged on the likes of WPP, UBM and Shire returning. The real test comes when industries that stimulate employment and the local economy, such as manufacturing, decide on the UK. Until then, the chancellor is paying a lot of money for very good PR.
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