UK’s tax regime remains attractive despite Brexit uncertainty – KPMG

The UK has retained its place as one of the world’s most competitive tax regimes, according to the KPMG Tax Competitiveness Survey 2018.

KPMG interviewed senior tax decision-makers at 77 of the UK’s largest listed companies and subsidiaries of multinationals, and a further 58 non-UK companies from across the G7 nations.

The findings show that, while the overall appeal of the UK’s tax regime has weakened slightly, the perception of many rival jurisdictions has also diminished further over the past year.

Half of all respondents named the UK as one of the three most competitive tax systems in the world, second only to Ireland which was identified by more than three in five (62 per cent) of those interviewed.

The gap between the two nations has closed from 15pp to 12pp, thanks to the UK’s competitive tax position in business services, property, transport, engineering and construction, and aerospace.

However, amongst the 58 non-UK companies surveyed this year, the UK sits in joint 5th place, alongside Switzerland, and behind Luxembourg, Singapore, Netherlands and Ireland, which retains the top position.

Encouragingly, the proportion of UK companies that are committed to keeping their tax residency in the UK has reached an all-time high in 2017. More than three quarters (76 PER CENT ) said that they didn’t have any plans to move their tax residency, the highest proportion achieved since the start of this study 12 years ago.

The balance comprises those that have moved or are considering and assessing moving from the UK. However, the number of companies that said that Brexit has made them more likely to move their tax residency has increased from 2 per cent to 10 per cent.

Alan Turner, partner and head of tax for KPMG in Scotland, said: “Businesses look for stability and predictability from tax regimes, not just attractive rates. The UK has largely maintained a business-friendly tax regime compared to many of its rivals. This survey shows that once a business starts operating in the UK, they tend to recognise the attractiveness of the country’s economic and tax environment and are likely to keep their base here. That stickiness is important. The tax rate in the UK is low and competitive, but is also being paid, which is good news for the Treasury.

“The US tax reforms were just coming through as we spoke to tax decision makers. We have yet to see the extent to which the reforms will set a new dynamic in the international business world. Organisations are still understanding the implications on their operations, and we may yet see governments considering policy responses as they seek to remain attractive to foreign investment. Brexit complicates that picture for the UK and the challenge for policy makers is to balance these tensions and create an environment that harnesses innovation and growth for the future.”

While most respondents said they were not looking to relocate their tax residency from the UK, there is a net balance of more firms looking to move certain business activities out of the country.

Functions, including finance (9 per cent relocate out, 3 per cent relocate in), group services (8 per cent / 4 per cent), manufacturing (5 per cent / 1 per cent), intellectual property (4 per cent / 2 per cent) and regional head office (5 per cent / 4 per cent), which are crucial sources of jobs and foreign direct investment, are more likely to be relocated out of the UK. Decisions over the location of holding companies and investment holdings, are largely positive displaying a trend towards moving into the UK.

For more than two fifths (42 per cent) of senior tax decision-makers, Brexit is still the overwhelming factor that they believe will have the most impact on their investment decisions in the next 12 months.

James Stewart, vice chair and head of Brexit for KPMG in the UK, said: “Without doubt Brexit brings an element of uncertainty to the current economic outlook which is challenging the UK’s reputation for a strong, resilient and attractive location for investment. Many firms are waiting to see how Brexit negotiations progress before making a firm decision. On the positive, the UK is seeing net inflows for businesses relocating some functions – notably holding companies and investment vehicles. Against this however, we are seeing some important job creators and drivers moving out of the country.”

When assessing the attractiveness of a tax regime, stability was the most commonly identified factor by UK companies (79 per cent), followed by the predictability of actions taken by the tax authority (78 per cent). Meanwhile, the rest of the world was more likely to look to a low effective tax rate (90 per cent) and then stability over the years (86 per cent).

Nearly a fifth (19 per cent) of respondents felt that the continued commitment to the reduction in the headline rate of corporate tax to 17 per cent should be the priority action for the Government to drive growth in the next 12 months. On average, respondents estimated that the reduction in the rate by 2020 – could boost capital expenditure by 11 per cent, headcount by 10 per cent and R&D investment by 13 per cent. The next priorities for action were a reduction in complexity and improved incentives to encourage investment in the country, both identified by 12 per cent of respondents.

Alan Turner, partner and head of tax for KPMG in Scotland, added: “Businesses are clearly looking for signs to show that the UK can remain a competitive and attractive place to do business, despite the turbulence of Brexit. As such, headline rates are important. However, our research also shows that simplicity and stability in the tax system are important too. While the Government has built a reliable and stable tax regime founded on attractive policies, we are seeing that conversation is increasingly moving towards the current complexity in the code and how it is administered.”