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Could Brexit turn Britain into a corporate tax haven?

Created: May 2016

Might a non-EU UK end up aping the tax havens that sparked so much criticism following the release of the Panama Papers?

For many of Britain’s European neighbours, the Brexit debate is merely the most explicit manifestation of the UK’s perennially ambivalent attitude towards the European Union (EU).

Whether it’s Maggie Thatcher’s handbag, the UK’s rebate or its opt-outs on everything from the Euro to pints and miles, Britain has long gone its own way within the European club.

One area that has frequently irked other European Governments is Britain’s consistent undercutting of them on corporation tax.

At 20 per cent, the UK’s level of corporation tax is already the lowest in the G7 group of major economies – a status it has enjoyed for most of the past 15 years. Yet under plans announced in the Budget, it is set to come down to 17 per cent by 2020 – which would give the UK the lowest corporation tax rate in the G20.

One area that has frequently irked other European Governments is Britain’s consistent undercutting of them on corporation tax.

The eye-catching cut was one of the high points in the Chancellor’s Budget speech, prompting him to proclaim “Britain is blazing a trail; let the rest of the world catch up.”

However the Eurozone’s two largest economies, France and Germany, have far higher corporation tax rates (at 34 per cent and 30 per cent respectively), and are grumbling that such a dramatic further reduction in the UK’s tax rate will effectively turn the UK into a corporate tax haven.

Corporation tax as sales pitch

George Osborne isn’t the first UK Chancellor to show such zeal for cutting corporation tax – his Labour predecessor Gordon Brown slashed it from 33 per cent to 28 per cent during his tenure at Number 11.

Both Chancellors, though from opposite ends of the political spectrum, reduced corporation tax for similar reasons – to give British businesses a boost, and to attract investment from overseas corporations.

But the steady reduction in corporation tax is also part of a long-term rebalancing of the tax burden from companies to individuals.

By all accounts the policy has succeeded in that second aim. Government figures estimate that in 2014 foreign direct investment (FDI) in the UK passed the £1 trillion mark for the first time. FDI created 85,000 new jobs in Britain in 2014/15, more than in any other European country.

But the steady reduction in corporation tax is also part of a long-term rebalancing of the tax burden from companies to individuals.

In the tax year 2013-14, the last year for which figures are available, corporation tax accounted for just 6.75 per cent of the UK’s total tax revenues, compared with 10.53 per cent less than a decade earlier in 2005-6.

Underpinning this gradual shifting of the tax burden is a pragmatic – rather than political – point. Companies are increasingly mobile; able and willing to up sticks and relocate to another jurisdiction if they can benefit from a more favourable tax regime elsewhere.

In a celebrated example, the world’s largest advertising group, WPP, moved its tax domicile from the UK to Ireland – and back again – in pursuit of more attractive tax rates.

The even more high-profile cases of Google and Facebook don’t involve physical movement, but rather the routing of profits through Ireland – which has even lower corporation tax than the UK – in order to reduce their UK tax liability.

By contrast, most employees are less mobile – and when faced with increased tax rates usually have little choice but to grumble and put up with it.

Risks of a “race to the bottom”

Leaving aside the Realpolitik, critics of the policy accuse the Chancellor of embarking on a “race to the bottom” with corporation tax. Such a race is unwinnable, they argue, pointing out that there will always be small jurisdictions – such as Ireland or Singapore – willing to cut their corporation tax even lower than Britain’s.

But perhaps the greatest danger of the policy is that it risks antagonising the Governments of our European and G7 trading partners.

At 39 per cent, the US has a corporation tax rate almost double that of the UK. Already frustrated at the way some of Silicon Valley’s biggest companies are channeling sizeable proportions of their global profits through their low-taxed operations in Ireland, US authorities might strike back.

The US could seek to neutralise the incentives offered by Ireland – and the UK – by taxing US companies on the profits they make overseas.

While the ability of EU countries to apply pressure on Britain over its low corporation tax policy is at present limited by the free trade guarantees offered by the UK’s membership of the European club, this protection could disappear in the event of a Brexit.

The Brexit in the room

A Britain that left the EU would potentially be at the mercy of retaliatory tariffs imposed by the rump European bloc.

Yet ironically Britain’s low corporation tax policy could become even more entrenched in the face of such tension.
The appeal of a non-EU UK to global investors would likely be diminished, potentially forcing Westminster to compensate by slashing corporation tax even further.

So while Britain’s low corporation tax drive has proven its worth as a way to both stimulate homegrown businesses and tempt companies from overseas to invest in Britain, it risks provoking a backlash from countries that blame the UK for poaching their investment.

The Conservative Government has long been hostile to anything that smacks of European tax harmonisation, so it’s possible that freed of any requirement to toe an EU party line on corporation tax, it might seek to turn a post-Brexit Britain into an unabashed tax haven.

So while Britain’s low corporation tax drive has proven its worth as a way to both stimulate homegrown businesses and tempt companies from overseas to invest in Britain, it risks provoking a backlash from countries that blame the UK for poaching their investment.

In the event of a Brexit, all bets would be off. While noone yet knows what the mechanics of a Brexit would look like, the uncertainty created is likely to put off potential foreign investors.

This in turn could lead the Government to up the ante – cutting corporation tax even further and turning Britain into an out and out corporate tax haven like the Cayman Islands without the sun.

While it’s unlikely that a post-Brexit UK would have anything other than good trade relations with the EU, there would be no guaranteed protection from EU tariffs.

It would be a supreme irony if a policy designed to make Britain more attractive to international investment ended up sparking hostility and even protectionism from our international rivals.

Toby Ryland, Corporate Tax Partner
T 020 7874 7959
E tryland@hwfisher.co.uk