Disaffected multinationals were urged on Thursday to spell out their concerns to the Treasury, after signs that some businesses are still considering leaving Britain in spite of this week’s concessions over the international tax regime.
The plea for greater dialogue was made by a senior Treasury official following a straw poll of 70 businesses suggesting that some remain frustrated by the government’s approach. About 9 per cent said they were more inclined to emigrate from the UK after the Treasury explained its current stance on taxing foreign profits.
But the same proportion of companies said they were less likely to leave, suggesting the Treasury has defused some of the controversy over its reform package by dropping contentious anti-avoidance proposals.
Chris Morgan of KPMG, which conducted the poll, said most businesses supported the Treasury’s decision to delay reforms in order to “get it right”. But a minority of businesses that had little reason to remain in the UK felt, “I have not been promised anything so why should I stay?”
Anti-avoidance measures dropped
Controversial anti-avoidance proposals first put forward by ministers last year have been dropped, it emerged this week . The government said certain elements of the changes, including the tax treatment of intellectual property, “could cause problems for business”. Instead, it wants to explore improving its existing anti-avoidance rules.
But the Treasury also disappointed businesses by refusing to press ahead with an eagerly awaited dividend exemption before it has agreed new anti-avoidance rules, on the grounds that it could lose more than £1bn from additional tax planning.
A “debt cap” – designed to stop companies eroding UK taxable profits by putting more debt in Britain than in the group as a whole – is likely to go ahead as part of the package.
The significance of the Treasury’s stalled attempt to introduce a dividend exemption – allowing tax-free repatriation of billions of pounds of foreign profits – was underlined by the poll, in which most companies said the reforms were crucial or very important to competitiveness. The poll was conducted among tax specialists and finance directors from large companies, including some FTSE 100 groups.
Any suggestion that the Treasury should give up its attempt to reform the taxation of foreign profits was firmly scotched by the poll, in which only 4 per cent of respondents said the package should be withdrawn completely. Nearly three out of four companies said the Treasury should bring forward the dividend exemption early, accompanied by “temporary” measures to fix the avoidance problems.
The Treasury, which has come under heavy fire for its approach to tax changes, won a rare endorsement over its approach to consultation. Four out of 10 said it had listened enough to the concerns raised by industry, while just over half said its approach was adequate.
Businesses have lost their former enthusiasm for a radical reform of the anti-avoidance rules, designed to stop them shifting income to low-tax jurisdictions. The KPMG poll showed four out of five companies wanted to retain the entity-based “controlled foreign companies” rules, rather than move to income-based “controlled companies” rules. Mr Morgan said this was a swing away from the view prevailing last year, reflecting recognition of the extra compliance burden a change would bring.
KPMG said a surprising result of its straw poll was that most businesses said they would be in favour of a general restriction on interest deductibility, instead of new anti-avoidance rules. This idea was put forward in a technical note by the Treasury this week but is likely to encounter strong opposition among affected companies.
