UK PLC Heads For The Exit

by Jeremy Hetherington-Gore, Tax-News.com, London

20 October 2006

The much-trumpeted meeting between UK Finance Minister Gordon Brown and the 'High Level City Group' this week seems to have been a dialogue of the deaf, while major international companies quietly continue to plan their departure from a taxation regime which is becoming more and more penal.

Speaking after the High-Level Group meeting, Gordon Brown observed: "The message that the City's success sends out to the whole British economy is that we will succeed if we think globally. But we must not be complacent about that success. So today's meeting has discussed concrete steps that will allow us to take forward an agenda, bringing business and government together, to equip us to meet the challenges of global competition and promote the City and its financial service expertise throughout the world. We look forward to continuing our discussions."

Doing his best not to be negative about the meeting, CBI Director-General Richard Lambert said: "We welcome the fact that the Chancellor has now recognised the financial services sector is a jewel in the UK economy and that its future depends on a light regulatory touch. HMRC should lessen the burden on the insurance sector and look at ways to open up the wholesale insurance industry."

But he continued: "The CBI has been in close dialogue with the Revenue since Sir David's Varney's review was announced in the Budget. The relationship between HMRC and business has deteriorated as the demands of the Government have grown. The attacks on previously accepted tax practices on the pretext of clamping down on anti-avoidance measures have been a matter of concern, for example.

"It is increasingly clear that the UK's current levels of corporate tax are unsustainable and, as a country, we are increasingly less tax competitive compared to our international rivals. It is vital that the UK's competitiveness - which is based not only on the tax burden but also the complexity of regulation, its volume and its enforcement - is enhanced. Business will judge the Chancellor on these terms."

No practical initiatives seem to have been discussed at the meeting, despite the fact that recent months have seen a swelling chorus of discontent from corporate Britain.

Recent straws in the wind have included the departure of several major wholesale insurers for the more welcoming environment of Bermuda, while a number of companies have talked openly about their dissatisfaction.

HSBC found it necessary to deny that it is actively considering moving its headquarters and tax domicile from the United Kingdom when the matter comes under review in 2008. Financial Planning and Tax chief, Chris Spooner, had said: "The UK used to be a good place to be for purely tax reasons. I am not sure if that is the case any more. HSBC pays a large amount of tax and we are the ones who decide who gets it. We take the competitive environment seriously and there are others like us."

Prior to the meeting, Richard Lambert had warned that the UK is often compared unfavourably with Ireland as a location, with its 12.5% tax rate: "A trickle of companies are relocating and our anxiety is that it does not turn into a flood," although he qualified this by announcing that: "I'm not suggesting we should have a tax rate of 12.5 percent, but we should recognise this is a very competitive space." According to CBI figures, the tax burden on firms based in the UK has increased by GBP59 billion since 1997.

It emerged this week that Merrill Lynch has recently moved additional departments to Dublin from London. The firm set up a major office in Dublin in 2004, and said it had selected Dublin to be the hub for certain of its support services in Europe. Now, Merrill Lynch is said to have established Dublin as its main European banking centre.

Under the EU's MIFID financial services legislation, coming into force in 2007, companies can establish themselves wherever they like in the EU, and are free to market their services throughout the Union. Go figure, as they say in the States.

The fund management sector has already seen a major migration of administrative functions away from London to Ireland and Luxembourg, and if nothing is done by the Treasury, as seems entirely probable, the banking industry will follow suit.

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