Overall the UK retains its position as the 2nd most competitive tax regime. But the UK has dropped from 1st to 5th amongst the non-UK companies surveyed. KPMG research points to possible net outflows of business functions from the UK. Executives cite Brexit as having the greatest impact on investment and business activities in 2017.
The UK has lost ground in KPMG’s annual rankings of both tax competitiveness and appeal as a destination for Foreign Direct Investment (FDI) largely as a result of Brexit uncertainty. This is according to 100 of the largest UK listed companies and foreign owned subsidiaries and 60 companies from across the other G7 nations surveyed.
As in 2015, the Irish tax regime tops the rankings with 74% of UK companies selecting it as one of their ‘top three’ and the UK again taking second place. What is noticeable however, is the widening gap between Ireland and the UK which was just 1% in 2015 but has grown to 9% in the past year (Figure 1).
Added to this, amongst the 60 non-UK companies surveyed this year the UK fell from first to fifth place in the rankings. Not only does this demonstrate a sharp decline in perceptions of the UK’s tax regime, there also seems to be a clear divide in sentiment between UK versus non-UK businesses.
Figure 1: Countries with the most competitive tax regimes 2012-2016 (overall mention in top three) (% UK companies)
Figure 1: Overall, which of the following countries do you think has the most competitive tax regime… and which do you think has the second most competitive tax regime… and which do you think has the third most competitive tax regime? (Any mention) Base size: UK companies incl. foreign subsidiaries (100)
Non-domestic businesses cite particular sensitivity to disruptions in trade deals and tariffs, an end to the UK’s access to the single market, and the mobility of skilled labour as reasons for concern. This indicates that the Brexit vote has raised questions about the UK’s overall appeal and the competitiveness of its tax regime versus other, comparatively more stable, European peers.
Robin Walduck, tax partner at KPMG in the UK, said: “In many respects this year’s survey suggests that it’s business as usual. Companies, regardless of where they are located, continue to make investment decisions based on a variety of factors that include political and economic stability, market size, the cost and availability of a skilled labour force as well as the national tax regime.
“The material change this year is that finance executives are now grappling with the question of how Brexit might impact current and future investment in the UK. It’s in this area we see a striking divergence between the views of UK companies and their G7 peers, providing some insight as to why the UK has started to fall out of favour.
“For companies already investing or located in the UK, their perspective is that it is an attractive place to do business and executives are broadly confident about the country’s future prospects. For those on the outside looking in, the picture is looking less positive and businesses are markedly more bearish. As Brexit negotiations get underway, this begs the question whether UK respondents are being too bullish with misplaced optimism, or if non-UK respondents are being too quick to discount the UK.”
No wholesale departures but we could see a possible net outflow of activity as a result of Brexit
Reassuringly, the research shows that companies are not planning to withdraw their entire operations from the UK. In fact the number of respondents considering taking business functions out of the country is broadly unchanged in comparison to the 2015 survey.
What is striking however, is that businesses seeking to move functions into the UK - a crucial source of inbound FDI - has dropped materially for both UK and non-UK participants this year. Added to this, executives cite Brexit as having greatest impact on investments and activities in the next 12 months and suggest it could ultimately lead to substantial reductions in investment and high-value activities, such as capital expenditure, employment and R&D investment.
Tim Sarson, tax partner at KPMG in the UK, noted: “Historically, the UK’s attractiveness has been driven by its status as a trading nation, stable politics and tax system - but Brexit is challenging this. It’s clear, the potential disruption of leaving the EU and ambiguity over the UK’s future economic prospects now weigh heavily on executives’ minds. Taken together with companies’ views on migration of business functions this points to a possible net outflow of activity from the UK in 2017 and beyond.”
The Brexit effect
In the 2015 study, ‘political stability’, ‘availability and cost of skilled labour’ and ‘access to a single market’ were identified by UK and international companies as being among the top five strengths of the UK versus its international competitors. This sentiment is echoed in findings this year.
At the time this research was undertaken, 46% of UK respondents and 41% of non-UK respondents identified their preferred Brexit scenario as being the UK joining the EEA, retaining full access to the Single Market and accepting the free movement of people. The second most popular was for the UK Parliament to vote not to trigger Brexit, severely delaying or preventing Brexit from taking effect. Clearly these scenarios are no longer viable options. However, what these responses do demonstrate is the desire from business for minimal disruption on exiting the EU, and for continued efforts to maintain a competitive tax system.
Tim Sarson added: “The UK enters the Brexit negotiations in a position of strength and clearly many of the aspects that make the country an attractive place to invest continue to hold true.
“Yet where steps can be taken to protect, or indeed improve, companies’ access to skilled labour, minimise political and economic disruption, and preserve the benefits of single market access, these would serve to reassure companies across the G7 of the UK’s strength as a destination for business.”
Turning the lens away from Brexit
The results of this year’s study also show the importance of resisting the temptation to focus all attention on Brexit. Tax and finance executives have consistently determined that long-term stability and predictability are key to ensuring the competitiveness of a tax regime.
In 2016, however, ‘low effective tax rate’ has risen up the agenda to the third most important factor determining the appeal of a country’s tax regime, from fourth in 2015. This suggests that the UK Government’s plans to reduce corporate tax rates to 17% in 2020 should continue to enhance the competitiveness of the UK: companies believe this could achieve material increases to capital expenditure, employment and R&D investments.
Also coming out of this year’s research are a number of constructive measures the UK Government could take to bolster the UK’s appeal to companies both at home and abroad. These include investment in infrastructure, particularly regional transport links and broadband networks, and developing workplace skills. The research also found that the creation of enterprise zones (with preferential tax rates, planning rules and other financial benefits) could have a significant impact in encouraging FDI in the UK.
Concluding, Robin Walduck said: “The overarching message from business to government is clear: keep disruption to a minimum and, where it is unavoidable, make sure you give plenty of warning. We also know that when it comes to attracting FDI, investors value a more cohesive business environment, incorporating not just tax reliefs, but also planning, grants, incentives, employment and other measures.
“On these factors, the UK has the opportunity to continue to build on its recent progress, and reap the benefits this will bring to its overall attractiveness as an investment location. The challenge for the UK Government during the next two years will be to avoid the trap of inertia during exit negotiations and to recognise there are still levers that can be pulled to help ensure the UK retains its appeal for both domestic and foreign investment.”
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Notes to editors
KPMG’s Annual Survey of Tax Competitiveness 2016 is based on interviews conducted with 100 senior tax decision makers in the largest UK listed companies and foreign-owned subsidiaries and 60 companies from across the other G7 nations, namely the US, Canada, France, Germany, Italy and Japan. These interviews were conducted between December 2016 and February 2017 by Gulland Padfield, the specialist consultancy.
The sample size of UK companies and foreign owned subsidiaries is similar to that of the 2015 study.
56% of the companies interviewed had a turnover of over £1bn. 22 of the companies interviewed were members of the FTSE 100, with another 21 in the FTSE 250.
The composition of individuals and companies interviewed were consistent with previous years of the project, allowing for reliable comparison of trends over the last few years.
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