Clause 4
Finance Bill
5:30 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I beg to move amendment No. 2, in page 2, line 30, leave out ‘28%’ and insert ‘25%’.
It is not often that tax hits the headlines and front pages of the newspapers, but to have two tax issues on the go at the same time demonstrates the scale of the concern. One area of concern has been about the 10p rate, which we discussed last week. In this case, the rate of corporation tax and the decision of UBM and Shire to switch their tax domicile from the UK to Ireland has propelled corporation tax to the front of the news agenda.
The immediate cause of the departure for both companies was the consultation on the tax of foreign profits. Both UBM and Shire have significant non-UK interests, and they were concerned about the direction that the consultation is taking; but that overlooks the fact that there are many companies now which have trodden the same path—not necessarily for the same country of domicile, but they have certainly chosen to leave the UK for tax purposes.
COLT communications moved its domicile to Luxembourg. Kraft, Google, Experian and Yahoo have all moved outside the UK. In some cases, that was part of other transactions, but part of the reason involved the competitiveness of the UK tax regime. In the financial services sector, Omega, Hiscox and Catlin moved their tax domiciles to Bermuda, because of its significantly lower tax rates and regulatory burdens on insurance businesses.
One of the crucial factors driving the debate about those companies and others looking to move offshore is the headline corporation tax rate, which has become increasingly uncompetitive. In 1997, the UK had the fourth lowest rate in the EU; now we have the 19th. That is starting to bite, and people are starting to think about it. A report by the City of London corporation entitled, “The impact of taxation on financial services business location decisions” highlights the deterioration of our competitiveness. The summary says:
“Until fairly recently the UK had what was felt to be a very attractive tax regime as regards both corporate and personal tax rates, but this has changed.”
Some 80 per cent. of respondents to the survey felt that the competitiveness of the UK regime had deteriorated in the past few years. It is not just about the rates of tax that companies pay. The report says:
“Critical other factors are Certainty of Interpretation and Predictability, and Attitude and Approach of the tax authorities.”
The UK had the worst scores among respondents on those factors.
A complex series of issues affect the reason why companies seek to move from the UK into other jurisdictions. When asked about the uncertainty of the tax system, survey respondents referred to the unpredictability of policy. Policy changes are introduced suddenly, taxpayers and their advisers have no sight of them and consultation does not take place. We saw that with the changes to capital gains tax announced in the pre-Budget report last October. Concerns were expressed about the difficulty of obtaining a definitive position from HMRC on particular tax planning issues. Again, that concern has undermined the UK’s attractiveness.
HMRC’s increasingly aggressive approach to closing the tax gap has led to uncertainty about tax rules. Some rules have been changed, which has had a negative impact on businesses. A helpful article appeared in The Tax Journal last week entitled “Shire plc: will the last one to leave please turn off the lights?” The author commented on the approach by the Government and HMRC to tax issues:
“The Government’s crusade against what it calls unacceptable tax avoidance has moved into many areas that used to be considered by HMRC as well as taxpayers to be perfectly acceptable tax planning”.
The article goes on to give some examples, but I shall not detain the Committee with them. It highlights the fact that practice has changed. It says:
“This type of tax planning was common within UK groups and was what enabled such groups to compete in the global market.”
People have noticed a more aggressive approach to what were hitherto commonly accepted tax planning schemes. That brings in more revenue for HMRC, but it caused the effective tax rate for those businesses to increase, because it was not offset by a reduction in the headline rate of corporation tax until last year’s Budget. Although we are not in the business of condoning aggressive tax planning, the clear lesson is that closing down those practices has led to increased tax bills without any compensatory decrease in the headline rate. It has made Britain’s tax regime uncompetitive and it has put the economy at risk.
What are the consequences of the deterioration in the competitive position of the headline rate of tax and the general changes in the tax system? It is certainly clear that tax has become an increasingly important factor in determining where firms locate their business. The City of London survey showed a consensus that there has been a seepage of jobs and business from London, and it highlighted the fact that competing financial centres such as Dublin, Switzerland and the Netherlands offer more attractive tax regimes than London. The tax and other advantages that Dublin offers mean, according to the survey, that about 25,000 jobs are in Dublin that could and should be in London. In the interests of balance, the survey also says that New York is seen as an uncompetitive centre with high taxes, a particularly aggressive tax authority and a fragmented, difficult regulatory structure. We would be in much greater trouble if the US sorted out that regime, which would provide a further incentive for businesses to relocate from London to other centres.
The report focuses on the financial services sector, which is very mobile. People in the sector have made comments in recent months about the ease of locating some of their business outside London. Hedge funds are moving to Switzerland and private equity companies are moving out of the UK. However, the problem is not specific to the financial services sector. Shire is a pharmaceutical company and United Business Media operates in the media sector and has relatively few UK-based assets. Both Google and Yahoo are high-tech internet companies, and Kraft is a food company. The concern about the deteriorating competitive position of the UK system is clearly felt across a wide range of sectors, not simply in the financial services sector.
With that in mind, it was interesting to see a quotation in the Financial Times last week from GlaxoSmithKline, the big pharmaceutical company—we are fortunate to have such companies based in the UK—in which the company said:
“We have no plans at present to relocate our headquarters for tax reasons...However, we believe that the UK business environment has to be realistic so it doesn’t impair our ability to compete globally, and it is important that the government ensures that the UK is an attractive location for companies who have headquarters here.”
Again, that is a clear signal that multinational businesses, working in a flexible global climate, are keeping an eye on all the factors that determine whether or not the UK has a relative competitive advantage over other locations in tax and so on.
Having identified the issue, what is the correct response? Amendment No. 2 proposes that we focus on the rate of corporation tax. The Government are mindful of the importance of the matter, and last week, the Chancellor issued a press release stating that a working party would be set up to consider some of these issues. It was surprising that there was so little detail in that press release. The working party’s members had yet to be identified and its terms of reference were in draft rather than finalised. I suspect that the Government were responding to the news about UBM and Shire, and were trying to demonstrate that they were doing something about it. At the Institute of Directors conference last week, the Prime Minister hinted that corporation tax rates could be cut. We always welcome imitation as a sincere form of flattery on tax matters. There is a long list of tax policies that the Government have tried to copy in recent months, and I shall not detain the Committee by naming them.