Roger Yates made up his mind after skimming through the newspapers on the
morning after budget day.
The chief executive of the Henderson asset-management group had been hoping to
read that the Treasury had scrapped a controversial new tax. Yates had
expected chancellor Alistair Darling to abandon a proposed tax on profits
earned by British companies overseas — it was simply too damaging. Dozens of
other FTSE bosses had thought likewise.
As he skimmed from one paper to the next, Yates realised the proposed tax
would soon become reality. It was time to dust down plans to move
Henderson’s headquarters out of London to the more favourable fiscal
environment of Ireland.
“We had been looking at the tax issue anyway,” said Yates. “After the budget
we realised we had to give it some serious consideration.”
For the past five years Henderson has been benefiting from an incredibly low
14% tax rate, thanks to losses stored up by its former parent company,
Australia’s AMP. Those tax losses run out next year, which would force
Henderson to pay the standard corporation-tax rate of 28%.
In Ireland, corporation tax is only 12.5%. By moving its headquarters to
Dublin, Henderson’s foreign profits are charged at the Irish rate rather
than the full UK rate, saving the company about £8.5m a year.
The move, announced last week, was a big one for Henderson, one of the City’s
stalwarts, which has been headquartered in Britain throughout its 74-year
history.
Henderson’s departure was the first of a mini-exodus last week. Charter, an
engineering group that can trace its roots back to Cecil Rhodes, the
Victorian colonial businessman, said it was leaving, followed by Regus, the
serviced-office specialist. Brit Insurance said it was considering joining
the ranks of insurance companies that have left for the tax haven of Bermuda.
Charter, announcing interim results last week, said it would retain its
listing on the London Stock Exchange but shift its head office and tax
residence to Ireland. The firm, which owns the international engineering
companies ESAB and Howden, produced a list of reasons for the move.
High among them was its “less complex taxation system that does not seek to
impose tax on the unremitted profits of subsidiary companies in other
jurisdictions”, something firms believe Britain’s Treasury is targeting.
MANY companies thought the tax issue had been resolved. In May, a posse of
some of Britain’s most powerful business people went to No 10 to warn Gordon
Brown and Darling of the consequences of arcane plans to change the rules on
the taxation of foreign profits.
The delegation included HSBC executive chairman Stephen Green, Vodafone chief
executive Arun Sarin, Astra Zeneca chief executive David Brennan, Glaxo
Smith Kline chief executive-designate Andrew Witty, BAE Systems chairman
Dick Olver, BAT chairman Jan du Plessis, Shell chief executive Jeroen van
der Veer and BP chairman Peter Sutherland.
There had been speculation that even mighty HSBC was considering moving away
from the UK. Chris Spooner, its head of financial planning and tax, went
public with the warning, saying HSBC had moved jurisdictions before and
could again.
That meeting led to a partial climbdown by the Treasury. A tax working group
including senior business leaders was set up, and in July the Treasury wrote
to the CBI saying the most contentious of the proposals had been abandoned.
Last week’s events, however, show the fire had not gone out, but was
smouldering underground. The Treasury letter had not completely appeased big
business’s concerns and, crucially, had not given a clear statement on the
future of tax policy.
It has become a key issue. Company chief executives and senior tax lawyers say
consideration of moving offshore for tax purposes has become a regular item
on board agendas.
Tax experts think there will be a steady trickle of departures. “It will be
death by a thousand cuts, but it will still be death,” said one senior tax
lawyer.
FOR the Treasury, reeling under an economic downturn it failed to anticipate,
and under pressure to boost the economy even though its coffers are bare,
the corporate exodus is an extra blow.
Officials insist that Britain remains a good place to do business and that
foreign investment flows remain healthy. They insist that there is no
large-scale exodus from Britain and that there is always movement in and out
of corporate headquarters, for a variety of reasons.
“The UK continues to offer one of the most competitive business tax regimes of
any leading economy, including the lowest headline rate of corporation tax
in the G7,” said a senior Treasury official.
The latest announcements, though, have provided the Conservatives with another
stick to beat the government. In a letter to Darling, the shadow chancellor
George Osborne laid the blame squarely on decisions taken by Darling himself.
“It is further evidence of the damage done to the UK by the confusion you have
caused in the last year over the future of our business tax regime, combined
with the fact that 10 years of a Labour government have left us with some of
the highest corporate-tax rates in the European Union,” Osborne wrote.
He urged the chancellor to cut Britain’s main rate of corporation tax from 28%
to 25%, paid for by scaling back some of the capital allowances firms enjoy.
He also said the government should adopt the proposals of an expert group
chaired by Lord Howe, the former chancellor, which advocated permanent
simplification of Britain’s highly complex tax system.
Certainly, there is a widespread perception in business that the government is
doing too little to ensure firms do not leave the country. One firm,
conducting an internal review of whether to relocate, was surprised one
afternoon to receive a call from Ireland’s inward investment body, lauding
its low-tax advantages.
“It is not unexpected that more companies have decided to go,” said Sue Bonney
at the accountancy firm KPMG. “We all know of companies that have been
looking at this.”
KPMG’s own surveys reveal how Britain’s tax competitiveness has declined over
the years, to the point where the main rate of corporation tax in the UK,
28%, is higher than the EU average of 25.8%. The level of tax is important
but so, too, said Bonney, is the way business now perceives the UK tax
regime. “One of the big issues is certainty,” she said. “In the past you
could be reasonably certain about how UK tax would pan out. But confidence
has been affected by issues such as the taxation of non-doms.”
The current mini-exodus has its roots in Treasury attempts to allay
multinationals’ concerns about how foreign profits are taxed in the UK. It
published a policy paper on the subject last year. At first, finance
directors thought they were on to a good thing: the document suggested
dividends from foreign companies should be exempt from tax and a restriction
would be put on relief allowed on foreign interest payments. Both moves were
welcome and — according to an analysis conducted for the 100 Group, which
brings together the finance directors of the FTSE 100 — would have brought
in slightly more money for Britain than the present regime.
The third set of proposals, however, was
a shock: there would
be no exception for “mobile” income — income the taxman judged could be moved
anywhere in the world, and could just as well be in Britain as overseas.
Mobile income was divided into two types — active and passive. The first
arose from a trading operation, the second from an investment, or from
intellectual property.
It was the last set of recommendations that caused uproar. It provoked the
delegation to No 10, and the subsequent climbdown by the Treasury.
“The July announcement was met with mixed feelings. Companies were relieved
they hadn’t gone ahead with the intellectual-property proposals, but
disappointed there wasn’t certainty about the way forward,” said Dominic
Stuttaford, at the City law firm Norton Rose.
In particular, the government said it would not go ahead with the basic plan
for exemption from taxation of all foreign company dividends.
The disadvantages of being resident in the UK have become more apparent as
more companies move offshore. “Any group with international operations
should be asking itself whether it is right for them,” said Stuttaford.
Worryingly for Britain, plenty of companies are doing just that.
Britain's loss is Ireland's gain
IRELAND’s restaurateurs may be anticipating a feast of directors’ lunches, but
news that a fresh batch of British companies plan to shift their tax
domiciles to Ireland will not have set champagne corks popping down at the
Irish exchequer, writes Aine Coffey.
Only profits made by the companies in Ireland will be subject to the country’s
12.5% corporation tax. This means there will be no big windfalls unless
British defectors also shift their trading businesses to Ireland — and there
are no signs that this will happen. Companies incorporated in Jersey but
domiciled in Ireland will even avoid stamp duty on Irish shares.
Nonetheless, the trend is seen as a winner. Ireland has been trying to
position itself as an attractive location for holding companies, introducing
legal changes over the past few years. The real significance of the British
incomers for Ireland is that they enhance its reputation as an attractive
place for holding companies, said Michael McGivern, partner at FGS, the
accountancy firm.
Irish tax enticements for holding companies include the fact that disposals of
subsidiaries are free of Irish capital-gains tax in certain circumstances.
“Ireland also has a fairly large tax-treaty network, which is good, and
there is attractive tax treatment for foreign dividends,” said McGivern.
Ireland does not have the equivalent of the “controlled foreign company”
legislation, under which Britain seeks to tax overseas subsidiaries’
profits. A central gripe of the British tax defectors is the onerous
compliance costs of their home-taxation regime.
Attracting holding companies fits with Ireland’s desire to be a centre of
excellence, said Enda Faughnan, a partner at the accountants Price
Waterhouse Coopers. “In terms of the strategic importance, I think there
will be spin-off benefits,” he said. “Centre-of- excellence operations tend
to be located around where headquarters are.”
The IDA, the Irish government agency responsible for attracting inward
investment, said: “Companies are definitely welcome to come here and we will
look for opportunities for them to expand their mandate. There will be no
short-term gain. However, in the longer term we will look for value-added
opportunities.”
Shire, the pharmaceuticals company that has had an operation in Ireland for
more than 10 years, seems a likely candidate for such IDA overtures. Charter
Group has said it will look at expanding its Irish activities.
United Business Media (UBM) said it expects to hire just “one or two” people
for its Dublin office. “It is a misconception to suggest we are moving our
corporate headquarters,” said UBM. “Our corporate headquarters remains in
London but all board meetings will take place outside the UK.”
For disaffected British companies, Ireland offers familiarity, proximity and
the English language, as well as a decent holding-company regime. The
mini-exodus from the UK, though, is seen as more of a British problem than
an Irish offering. “It was never about the amount of tax paid, about saving
money,” said UBM. “It was about the certainty and simplicity of moving to
the Irish tax regime. Tax savings, if there are any, will be modest.”
