Big business heads for departure gates as discontent with tax regime swells

The decision by Shire and United Business Media in April to move their tax
domicile from Britain to Ireland has proved a tipping point.

Rather than just muttering about the constant tinkering with the corporate
tax regime, UK multinationals, tax consultants and trade associations have
publicly condemned the government’s proposed changes to the tax treatment of
foreign income.

John Whiting, tax partner at PricewaterhouseCoopers, said: ‘The Shire and UBS
decision to move to Ireland has brought the problems that have been bubbling
under the surface into sharp focus and pushed this issue back onto the boardroom

Sir Martin Sorrell, chief executive of advertising giant WPP, said his
company would also consider moving if the proposals were implemented. ‘The
proposals will lead to the exodus of a number of multinationals,’ he said.

This public criticism galvanised the government into action of a sort. The
beleaguered Chancellor, Alistair Darling, said the government would form a
working group to look at the long-term challenges facing the UK tax system.

‘I am determined that we do what is necessary to remain one of the world’s
best places to do business and to ensure we maintain our strong, resilient
economy and our position as the world’s leading financial centre,’ said Darling.

His action was welcomed by tax consultants. Bill Dodwell, head of tax policy
at Deloitte, said: ‘I hope the Chancellor now realises the size of this problem
and the negative impact that these changes could have on the UK economy.’

Ironically, the proposed changes to the treatment of foreign income were
supposed to make life simpler for British business. For a long time, UK
businesses had been asking the government not to charge tax on dividends paid
out of profits earned abroad. The Treasury recently agreed in principle to these
exemptions, but said that anti-avoidance rules had to be tightened.

The government has proposed that worldwide ‘passive income’ ­ including
earnings from interest and royalties ­ should be taxed. This has a particular
impact on pharmaceutical and media companies, which make much of their profits
from intellectual property and royalty streams.

At the recent presentation of its first quarter results, AstraZeneca FD Simon
Lowth said: ‘The corporate structure is reviewed from time to time in light of
changes to the commercial, the tax environment and our wider business
activities, but as yet we don’t have any formal plans to change the existing

The company has since said it would not be leaving the UK.

While businesses are frustrated with the government complicating rather than
simplifying the tax regime, its proposed changes have sparked other concerns.

Ian McCafferty, chief economic adviser at the CBI, said: ‘These changes will
deter companies from remitting these profits to the UK. That will reduce the
funds that companies have available to make investments in the UK, which will
harm the health of the economy.’

Since Labour came to power in 1997, the tax system has become increasingly
complex. The UK now has the longest tax code in the world, resulting in the
spiralling cost of compliance.

‘While the change to the tax treatment of foreign income is the most urgent
issue,’ said McCafferty, it is just part of a broader issue among the business
community about the whole UK corporate tax system.’

McCafferty fears that the UK tax system is eroding the competitiveness of
British business. ‘Ten years ago our tax system was highly competitive, but it
isn’t any more,’ he said.

There is also growing frustration with the government’s tendency to act
McCafferty said the constant changes to the system, many of which are
retroactive, made it increasingly difficult for businesses to commit to
long-term investments.

Companies are increasingly demanding that legislators start afresh rather
than cutting and pasting together the corporate tax system.

‘Making the UK tax system more attractive would attract more businesses to
the country and generate higher corporation tax receipts over the longer term,’
said McCafferty.

Martin Temple, chairman of manufacturers’ organisation EEF, welcomed the
government’s launch of a strategic review.

‘We want them to demonstrate that they are committed to reducing corporation
tax,’ he said. ‘Rather than rushing out some minor changes, we would much rather
that they made a strategic statement of intent and made it clear that there will
be a radical rehaul of the corporate tax regime.’

In March, the CBI’s tax taskforce outlined its proposals for such an
overhaul, including cutting the corporation tax rate to 18% ­ matching the new
capital gains tax rate ­ within eight years and simplification of the tax system
to stimulate the growth of small and medium-sized businesses.

In its report, the CBI said that the UK was facing stiff competition from
other EU countries, including the Netherlands and Portugal, which have already
cut their corporate tax rate to 25%, while Ireland’s is only 12.5%.

Even though most think the government is finally getting the message that
British business is seriously concerned about the changes to the tax system,
some doubt that the government has the stomach to do anything ambitious.

Corporate tax raises a significant amount of money for the public purse:
£50bn, or about 9% of its total income. Whiting said the size of the business
contribution to the national finances made sweeping changes to the system less

As Mark Prisk, shadow minister for business and regulation, said: ‘The
reality is that the government’s cupboard is bare. It has been spending money
like a drunken sailor.’

This article first appeared in the June issue of

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