UK corporates moving overseas: will they stay or will they go?

The Treasury claims the policy is revenue neutral

Is the UK corporate world about to get a tax controversy to match the furore
over the abolition of the 10p tax band?

If you read all the stories over the past few weeks about moving corporate
headquarters out of the UK and overseas, you might conclude just that. A
succession of companies have either said they are heading for the hills to
escape the UK or publicly announce that they might leave, if things don’t

The reason ­ uncertainty over corporate tax and more particularly the
government’s controversial proposal on taxing foreign profits.

It’s those proposals that have prompted some companies to decide enough is
enough and move the corporate HQ abroad prompting sensational headlines and
another headache for Gordon Brown and Alistair Darling over tax reform.

Here’s the trouble. The Treasury wants to reform the taxation of foreign
profits to do away with complex arrangements to deal with double taxation. The
answer is to exempt from tax all dividends paid on foreign profits. However, the
Treasury’s quid pro quo is a new Controlled Companies regime in which a new
‘passive income’ rule allows the UK government to ‘tax artificially located
profits that are effectively within the control of the UK parent’.

This second part is an anti-tax abuse measure that companies claim will hurt
them badly. Firstly because it will catch income from intellectual property,
which is ‘hardly artificial’, so it will be unfair. Secondly, it will capture so
much income that it will undermine the Treasury’s claim that the policy is
revenue neutral. In fact, companies argue that the policy will significantly
extend their tax base.

Some speculation put the money raised from the ‘passive income’ rule at £1bn
­ a figure one tax adviser called ‘possible’.

Lastly, companies will be hit again because the policy will add hugely to the
compliance costs.

The policy pushed Shire Pharmacueticals ­ a company with significant
intellectual property generating income abroad ­ over the edge and a decision to
become resident in Ireland. Other pharmaceutical companies face a substantial
risk from the policy, leading to fevered press speculation. So feverish in fact
that, according to one insider, AstraZeneca felt compelled to reassure the
government it had no intention to pack its bags and go.

However, the corporates are feeling ‘uncertain’ about the future. Bill
Dodwell, a tax partner at Deloitte, said: ‘It’s not uncertainty that it will get
better, it’s uncertainty that things will get worse.’

The government has set up a special working group to look at the UK’s tax
competitiveness but observers believe it will be dominated by the foreign
profits issue.

But while there is appreciation among heads of tax of the consultation now
set in place, it remains too early to see what the group might come up with in
terms of solutions.

One answer could be to encourage intellectual property back onshore with
preferential tax rates, somewhere between 5% and 10%, Bill Dodwell suggests.

One thing is for certain: unless a convincing proposal comes out of the
working group, we could see departure lounges filled with UK executives. Some
estimates say at least 20 UK corporates have now aired threats. Then the bad
press over tax policy will start all over again.

Paying the price

On the face of things moving a corporate HQ doesn’t sound like too great a
loss. Operations will probably remain in the UK and so would the listing.

But experts say losing HQs should not be underestimated by the Treasury.

For one thing there are all the jobs that would go. These would be the staff
that support company managers.

These can number in the hundreds, perhaps more than a thousand, for some

But then there are the services these staff procure on behalf of the company.
It wouldn’t make sense to continue sourcing those in the old HQ location. If you
move an HQ to Ireland, new staff are likely to buy in services from Irish

Observers say this could amount to a significant blow to the UK economy.

Related reading