Following the Brexit vote, the now ex-Chancellor George Osborne announced a plan to cut corporation tax to less than 15%. As a result, many are now debating whether this would be the right move for the UK – and whether it would turn the country into a tax haven for multinationals. In this blog we explore the potential implications of a cut in corporation tax rates and how this could impact accountancy firms and practices.
The proposed tax cut was intended to signal that the UK is still “open for business” following the vote to leave the EU and would mean that Britain has the lowest corporation tax of any developed economy.
Philip Hammond, Osborne’s successor, has since refused to confirm whether he will follow through on the pledge, saying instead that the government “will be looking at what the marginal effective rates of corporate tax are for investors in the UK.” However, it has raised some important questions about how a change in corporate tax rate could support our economy as it faces a sustained period of uncertainty and dramatic change.
The question that is immediately raised is what will happen in Dublin? At the moment, Ireland is under pressure to increase taxes as the EU looks to harmonise tax rates across Member States, though they are obviously reluctant to change rates that have proven so attractive for their economy. If this were to happen, regardless of whether Britain changes its current tax rate, Irish companies are likely to lose some of their competitive advantage. Couple that with the fact that post-Brexit the UK will be in a position to set its own tax rate, and suddenly there is a real chance that large Dublin-based corporations will consider moving their headquarters to the UK in order to capitalise on a lower tax rate.
At the moment, the higher UK rate of corporation tax is enough to outweigh the recruitment advantages of being located in London. However, bring the rate down to a more comparable level and England’s capital becomes a very attractive option for businesses. Ultimately, it’s one thing being in Dublin for tax reasons, but if that advantage is taken away, London offers far better recruitment and growth prospects.
There is also the reputational aspect to consider. Firms such as Google have come under huge scrutiny by the British public for its tax dealings while operating out of Dublin. In the current situation, the social advantage of moving a HQ to the UK is unlikely to outweigh the huge loss of profits firms such as Google would see under current tax rates. However, this could easily change if Britain drops the rate to a level closer to that of Ireland.
Another key consideration is access to the single market. The UK has benefitted from being an English speaking point of entry to Europe for international companies. In the same way that we have seen a surge in applications for Irish passports, businesses may want to find a way of remaining in the single market by establishing themselves in Ireland. Similarly, if Scotland leaves the UK and joins the EU, it could also be another country in which businesses look to set up shop. Of course businesses aren’t going to up sticks and relocate entirely, instead they will be looking for ways of remaining in the single market with as little business impact as possible.
So what opportunity does this present to accountants?
A drop in corporation tax coupled with an exit from the EU could mean businesses want a foot in both camps, enabling them to remain a part of the single market while also capitalising on a low tax rate in the UK. Therefore, we could see a demand for services based on how businesses can go about accessing the EU market as before, as well as services for those wanting to take advantage of the most competitive tax rate on offer.
Businesses will be trying to plan ahead as to the operational considerations of being outside the EU versus the tax advantages of being outside, and as a result will be looking for advice. Firms therefore need to be prepared to take advantage of this opportunity to get closer to their clients.
Practices may also want to consider where they are based in order to best support their clients. If businesses do want to capitalise on a kind of ‘dual nationality’, firms need to consider how they can provide this service and where they need to be situated in order to do so. Obviously those firms who are part of a network may more readily benefit from location services, smaller firms however may wish to consider some other form of collaboration.
Ultimately, with the likes of Google, Apple and Facebook already under a lot of pressure to move their headquarters to the UK and with Brexit now a reality, a migration to London is a real possibility and firms need to be ready for it now.