The proportion of companies considering leaving the UK has more than doubled since 2007, according to KPMG’s third annual survey of the UK’s tax competitiveness.
In a survey covering 50 of Britain’s largest businesses, the percentage actively considering moving their tax residence out of the UK jumped from 6 per cent in 2007 to 14 per cent in 2008 – 16 per cent if a respondent who had already left was included.
And whilst the survey was completed just prior to the Pre-Budget Report at the end of November 2008, the announcement in the Pre-Budget Report that the government intended to exempt foreign earned dividends from UK tax did little to change the minds of those considering migrating.
Following the Pre-Budget Report, those who had said they were actively considering leaving the UK were asked if they were going to reconsider and, of the seven out of eight who could be reached, just one appeared open to a change of heart, saying they would reserve judgement as to whether they may reconsider.
This relatively lukewarm reception came despite the fact that such an alteration to the tax treatment of foreign dividends was one of the key changes business was hoping for as part of an ongoing review of the taxation of foreign profits.
Sue Bonney, head of tax at KPMG Europe LLP, said: “In last year’s tax competitiveness survey, we cautioned that the UK was at a tipping point and was in danger of losing jobs and investment because of its tax laws. Since then, we have seen a number of companies leave the UK and tax competitiveness become an increasingly high priority for the authorities and government. If the trickle of companies leaving is to be prevented from becoming a flood, further action is needed, and quickly.
“We have now seen the draft legislation on the exemption of foreign dividends and there were welcome words in the pre-budget report about moving to a ‘territorial’ system of taxation – in other words no longer seeking to tax profits earned overseas which is a major bugbear for business – but what we need now is evidence of real progress on how to achieve this.”
There were, however, some indications in the KPMG survey that the situation had improved, particularly around the way in which the authorities consult with business on tax changes. Almost two-thirds of respondents (64 per cent) agreed that the Varney review had resulted in better consultation with business and the proportion of respondents citing “lack of open and effective consultation with tax authorities on new legislation” as an influence on whether they might expand in the UK had dropped from 58 per cent last year to 36 per cent this year. And when asked if the authorities were listening sufficiently to businesses views, fewer than four out of ten said no.
Chris Morgan, head of international corporate tax at KPMG, added: “The flurry of migrations last year really highlighted how strongly businesses feel about the way in which the UK taxes foreign profits. The proposed dividend exemption rules are generous and partly address this. What we need now is a clear understanding of how the controlled foreign company rules – which tax certain foreign profits automatically in the hands of a UK parent – will be amended so we can have a true territorial system.”
According to KPMG, there are significant concerns among businesses about the likely administrative burden of complying with the so called “debt cap” that is to accompany the dividend exemption. Chris Morgan explained: “It is unfortunate that the dividend exemption has been coupled with a proposal to restrict interest deduction based on a group’s worldwide external debt. This is likely to create a major compliance burden, increase the tax cost for certain groups and discourage inward investment to the UK.”
© Investment & Business News 2013