Brexit knocks UK’s appeal as business destination in KPMG rankings

KPMG’s annual survey shows that the UK is still an attractive place to do business, despite falling in rankings in both tax competitiveness and appeal as a destination for Foreign Direct Investment (FDI). These declines are mostly due to the uncertainty surrounding Brexit, leading to caution particularly from non-domestic businesses.

Although the UK has retained its overall position as the second most competitive tax regime for businesses, after Ireland, the gap between the two has widened from 1% in 2015 to 9% in 2016. Furthermore, amongst the non-UK companies surveyed, the UK has dropped quite significantly from first to fifth place. The UK has also lost ground as the most attractive destination for FDI. While in 2015 the UK topped the list for both UK and non-UK companies, Ireland has now overtaken the top position, being tipped by 39% of respondents in comparison with 24% for the UK.

The findings demonstrate a notable divergence in opinion between UK companies and non-UK companies. KPMG’s report raises the question: “are UK respondents being too bullish with misplaced optimism, or are non-UK respondents too bearish and too quick to discount the UK?”

Brexit: concerns and implications

Factors previously cited as reasons behind the UK being an appealing destination for business – such as political stability, availability and cost of skilled labour and access to a single market – are now the greatest sources of concern for companies post-Brexit.

46% of companies surveyed cited Brexit as having the greatest impact on businesses in the upcoming year, which could potentially lead to a reduction in high-value business activities and investments.

Respondents specifically outlined the following possible impacts: significant decreases in capital expenditure; reductions in headcount; and reductions in R&D investment.

Despite these concerns, the report shows that there is no real shift toward companies looking to move business out of Britain. However, in reverse of the 2015 report, businesses looking to move business functions to the UK has dropped considerably in 2016 – which is a crucial source of FDI.

Overall, companies are generally postponing important investment and location decisions until the picture of a post-Brexit UK is clearer. With elections imminent in the UK, France and Germany, it is likely that meaningful Brexit negotiations will be postponed until later this year.

Tim Sarson, tax partner at KPMG in the UK, noted: “Historically, the UK’s attractiveness has been driven by its status as a trading nation, stable politics and tax system – but Brexit is challenging this. It’s clear, the potential disruption of leaving the EU and ambiguity over the UK’s future economic prospects now weigh heavily on executives’ minds. Taken together with companies’ views on migration of business functions this points to a possible net outflow of activity from the UK in 2017 and beyond.”

What can the government do to mitigate post-Brexit concerns?

The government has pledged to reduce corporate tax to 17% in 2020, which has been positively received by businesses who have said this will likely increase their UK investments and activities. However, many companies surveyed believed the government should consider even further cuts to continue to enhance the UK’s competitiveness.

Across the companies surveyed in the report, the corporate tax cuts are predicted to increase capital expenditure, headcount and R&D investment.

The report further outlined a number of advisory measures for the government to consider to make the post-Brexit business climate more appealing for national and international companies.

UK companies’ concerns were primarily based around availability and cost of skilled labour and access to infrastructure. Therefore, the report recommends greater investment into these areas – particularly through developing workplace skills and investing in regional transport links and a more reliable broadband network.

G7 companies surveyed were primarily concerned with the impact of Brexit upon international trade, specifically favourable tariffs and trade deals and access to a single market. This report suggests that the creation of enterprise zones, with preferential tax rates and other financial benefits, would be most beneficial in encouraging further FDI in the UK.

Another priority is for the government to ensure simplification and clarity in upcoming tax changes. Tax and finance executives emphasised the complexity and volume of new tax legislation to be one of the greatest challenges facing businesses in managing their tax affairs. While these concerns are not new, they are of increased interest this year, in part due to Brexit-related changes, but also the implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

Conclusion

As expected, Brexit is the biggest source of concern for businesses this year, and has already shown to have negatively impacted the appeal of the UK as a business destination. However, most of these concerns are rooted in uncertainty, and overall the UK is still an attractive place to do business.

The government will need to work to mitigate concerns of businesses, particularly through developing corporate tax cuts.

Robin Walduck, partner and head of international tax at KPMG, concluded: “The overarching message from business to government is clear: keep disruption to a minimum and, where it is unavoidable, make sure you give plenty of warning. We also know that when it comes to attracting FDI, investors value a more cohesive business environment, incorporating not just tax reliefs, but also planning, grants, incentives, employment and other measures.

“On these factors, the UK has the opportunity to continue to build on its recent progress, and reap the benefits this will bring to its overall attractiveness as an investment location. The challenge for the UK Government during the next two years will be to avoid the trap of inertia during exit negotiations and to recognise there are still levers that can be pulled to help ensure the UK retains its appeal for both domestic and foreign investment.”

 

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