One swallow doesn’t make a summer, but maybe three companies in three days announcing their plans to depart these shores for lower tax paying havens makes a winter.
First off it was the fund manager Henderson. And on the same day engineering company Charter followed suit.
In both cases, corporation tax was the big factor that made the duo choose their move. Henderson has been using losses made by its previous parent company, Australia’s AMP, so that it was paying corporation tax at just 14 per cent. Charter was in a similar boat. It too had made losses in the past, and was paying out tax at just 16 per cent. But for both, the pot of deferred losses was running out and both faced the prospect of paying out tax at 28 per cent.
In Ireland the tax rates for the two firms would be just 12.5 per cent, so it appears that the decision to move was something of a no-brainer. Foreigners living in the UK also suffer the additional worry of having to pay tax on foreign income if they have lived here for 7 years, or, alternatively, paying out £30,000. So for a company like Henderson with a high number of foreign workers, this was an additional concern.
That was Thursday, then on Friday it was Regus’ turn. Regus is that firm which provides serviced offices, a useful service for smaller companies, especially start-ups wanting to move somewhere quick without making long-term lease commitments. Well, Regus is off to Luxembourg via Jersey. Their holding company will be Jersey incorporated, the head office and tax residency will be Luxembourg.
According to Simon Evans writing in yesterday’s Independent, it is rumoured that no less than 12 FTSE 100 companies are considering moving their head office from the UK.
The solution is easy to define – slash corporation tax in the UK. But should the chancellor do this?
Should corporation tax be lower than income tax? In recent years we have seen corporate turnover distributed from workers to shareholders as profits rose, while wages did not rise so fast. At the end of 2006 a report came out saying that in the US, corporate profits as a percentage of GDP were at their highest level since 1929.
On the other hand, if corporation tax is put on a par with income tax, there will be a sharp exodus of firms to kinder tax regimes
That is the price of globalisation.
Mind you, without globalisation, the potential for corporate turnover and profits would be very much lower. The City of London offers many advantages to the companies that are located there. These advantages will not disappear overnight, regardless of changes to tax. In his book Emergence, Steven Johnson showed how cities often retain their own unique specialisations over centuries.
“Imagine a contemporary citizen of Florence who time-travels back eight hundred years, to the golden age of the guilds,” requested Johnson. He went on to talk about how different the city would be, how lost the modern day citizen of the city would feel. “And yet,” said Johnson, “despite that abject confusion, one extraordinary thing remains constant: our time traveller would still know where to buy a yard of silk. Fast forward a few hundred years, and he’d know where to pick up a gold bracelet, as well. And where to buy leather, gloves, or borrow money. He wouldn’t be equipped to buy any of these things, or even to communicate intelligibly to the salesmen – but he’d know where to find the good all the same.”
Johnson went on to explain how this same effect applies to cities across the world, including, of course, London.
So cities have a kind of stickiness, it is what economists call economies of agglomeration. So, craftsmen work near each other and “share techniques and services that they wouldn’t necessary be able to enjoy on their own. That clustering becomes a self-perpetuating cycle; potential consumers and employees have an easier time finding the goods and jobs they’re looking for; the shared information makes the clustered business more competitive than the isolated ones.”
The point of this little aside about cities is this. When we observe the huge profits enjoyed by London’s banks and investment houses, it is tempting to say let’s tax them. But others argue this will drive these same firms away– we will in effect kill the goose that lays the golden egg.
But when we examine the emergence of the cities argument put forward by Johnson we see that actually both sides are right – but only up to a point.
London offers its businesses and workforces many advantages. So great are these advantages that it is possible to justify corporation taxes for City firms which are slightly higher than rates payable in other countries. But, and this is the key, if tax rates rise too high, and too many firms are driven offshore – then London could lose its key advantages.
Once lost, London’s pre-eminence can never be recovered. So when one attempts to tax the City’s profit-making machines, it is essential that extreme care is taken.
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