UK second to Ireland in tax competitiveness

Ireland remains the most competitive tax regime in the world, but the UK is close behind, according to analysis from KPMG

The firm 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.

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%) 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.

Melissa Geiger, head of international tax at KPMG in the UK, 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.’

KPMG says the proportion of UK companies that are committed to keeping their tax residency in the UK has reached an all-time high in 2017, with 76% saying they have no plans to change status, the highest proportion achieved since the start of this study 12 years ago. However, the number of companies that said that Brexit has made them more likely to move their tax residency has increased from 2% to 10%.

There was also a net balance of more firms looking to move certain business activities out of the country. Functions, including finance (9% relocate out, 3% relocate in), group services (8% / 4%), manufacturing (5% / 1%), intellectual property (4% / 2%) and regional head office (5% / 4%), 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%) 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, 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%), followed by the predictability of actions taken by the tax authority (78%). Meanwhile, the rest of the world was more likely to look to a low effective tax rate (90%) and then stability over the years (86%).

Nearly a fifth (19%) of respondents felt that the continued commitment to the reduction in the headline rate of corporate tax to 17% should be the priority action for the government to drive growth in the next 12 months. The next priorities were a reduction in complexity and improved incentives to encourage investment in the country, both identified by 12% of respondents.

Geiger said: ‘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.’

Report by Pat Sweet

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