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ANALYSIS: Is Britain too open for business?

While George Osborne’s budget last week continued to advance the government’s message that the UK is open for business, some argue that this end-goal is being too aggressively pursued and that in fact the country is becoming too open for business.

The cut in the corporate tax rate – from 26% to 24% from April rather than to 25% as previously announced, and further down to 22% in 2014 – will improve confidence that the UK is indeed “open for business” and along with the revised controlled foreign company (CFC) rules should indicate to investors that the UK’s corporate tax regime is becoming more and more of a competitive option.

With a rate of 12.5% available in neighbouring Ireland, however, some questioned the merits of losing more revenue from a further cut in the UK rate, but John Cridland, director general of the Confederation of British Industry (CBI), thinks it might be a pivotal move.

“An extra 1% off corporation tax this year could make a big difference to investment decisions,” he said.

Avoidance

However, something that would negatively affect investment decisions is retrospective law changes. The worrying trend of retrospective amendments to legislation – as seen with Australia strengthening its general anti-avoidance rules (GAAR) and India proposing legislation to retrospectively tax Vodafone-style transactions – could become a concern for UK taxpayers too as the country comes nearer to introducing its own GAAR.

Comments from Osborne about the “moral repugnance” of tax avoidance and evasion, as well as his willingness to act retrospectively, are a warning sign to investors and buck the trend in showing the UK as open for business.

The revised CFC rules, applicable from January 1 2013, contain welcome news for finance companies in particular, with a new exemption introduced – yet another pro-business measure – but are criticised for the extent they are being watered down.

The finance company partial exemption will effectively mean that such companies pay a quarter of the main rate on profits from overseas group financing arrangements. However, ActionAid claims the new provisions will cost developing countries £4 billion ($6.3 billion) a year in lost tax revenues.

In line with this claim, further criticism has come in the form of accusations being levelled at the government of policies being written by, and made for, big business. The make-up of the government’s various working groups for tax policy matters has been censured in particular.

The Guardian made the accusation just last week, bemoaning the fact that successive UK governments have installed such groups, for example a monetary assets working group comprising Vodafone, Shell, Diageo, Tesco, G4S, International Power and BHP Billiton.

The phasing in of a 10% rate for profits attributed to patents from April 2013 will encourage greater innovation and investment in intellectual property

Not just one-way traffic

While arguments that the UK is being overly lenient in its treatment of business find evidentiary support in various provisions contained in the budget, big businesses are not getting everything their own way, as the banks will tell you.

The increase in the bank levy from January 2013 – increasing from 0.088% to 0.105% – shows the UK government’s commitment to taxing the financial sector and should go some way to refuting claims that the budget was unashamedly pro-business. Government explained the rate increase by saying it wants to meet the £2.5 billion revenue target set for the levy, as well as ensuring banks do not see too many of the positive effects of the corporate tax rate reduction.

Osborne is playing a tricky game in trying to balance an image of being welcome to foreign direct investment, while not being seen to be giving businesses everything they want in the eyes of a discontented public and he surely cannot appease both sides indefinitely.

Further reading:

Everything you need to know about the UK budget

Why the future of UK CFC reform is looking bright

The real reason Aon is moving its headquarters to the UK

ANALYSIS: Why taxpayers should consider relocating to the UK

How George Osborne can stimulate the UK economy

Why Australia is strengthening its GAAR

India to target Vodafone-style transactions going back 50 years

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