George Osborne, U.K. chancellor of the exchequer, waits backstage before speaking during the 2016 British Chamber of Commerce (BCC) annual conference in London, U.K., on Thursday, March 3, 2016. Alternative trading arrangements with the European Union in the event of a British departure from the bloc would pose 'serious risks' to the prosperity of Britain, Prime Minister David Cameron's government said. Photographer: Luke MacGregor/Bloomberg *** Local Caption *** George Osborne
© Bloomberg

Britain has failed to regain its top slot in a league table of multinationals’ favourite tax regimes in Europe, in spite of George Osborne’s plans for further rate cuts.

The UK has closed the gap on first-placed Ireland, however, and has moved further ahead of other low-tax rivals, such as Luxembourg and Switzerland, a survey found.

The findings were hailed by the Treasury as “an important vote of confidence in the UK economy”. There would be further improvements set out in the “business tax roadmap” that would be released at the Budget, it added.

David Gauke, financial secretary to the Treasury, said: “It confirms that firms are investing and creating jobs here, not just because our taxes are low but crucially because our taxes are stable and competitive.”

The annual survey of executives’ attitudes to European tax regimes by KPMG, the professional services firm, has charted the impact of the chancellor’s policy of cutting corporate tax to attract business to Britain. The latest survey suggests tax rates have become less important than simplicity, stability and predictability in determining attitudes towards a country’s tax regime.

Robin Walduck, a KPMG partner, said companies had stressed the importance of advance warning of tax changes, in a sign of the controversy around the rapid introduction last year of anti-avoidance legislation known as the diverted profits tax.

However, there has been a sharp reduction in the number of companies looking to relocate activities such as finance and service functions out of Britain over the past three years. The number of companies considering a relocation of their tax residence this year has fallen by almost half. Even so, 5 per cent were looking to move manufacturing activities to another country.

Mr Osborne has overseen a sharp cut in the corporate tax rate from 28 per cent in 2008 to 20 per cent, as well as radically reforming the way that foreign profits are taxed in an attempt to create “the most competitive business tax system of any major economy in the world”. Last summer he announced a further 2 percentage point cut to corporate tax over the course of the parliament.

In 2009, the survey suggested Britain was at risk of losing some of its largest businesses as a result of complaints over business taxation and the introduction of the 50p income tax rate on the highest earners. By 2013, Mr Osborne hailed a “remarkable turnaround” when Britain began to be mentioned more often than jurisdictions such as Ireland, Luxembourg and Switzerland by executives asked about the most competitive tax regimes in Europe.

But companies described the strong political and public furore surrounding avoidance in Britain as a deterrent to investment and, after two years in the top slot, the UK moved into second place behind Ireland.

The latest survey showed companies were broadly supportive of the international crackdown on practices such as base erosion and profit shifting. But many raised concerns over proposals to limit the amount of interest that can be deducted against tax, with details expected in next week’s Budget. KPMG said it was a “real risk” that foreign investment into the infrastructure sector would be significantly affected.

Respondents identified the main strength of the UK for inbound investment to be political stability, as well as highlighting “macroeconomic stability” and “access to a single market” as appealing features. The research was conducted in the autumn of 2015, when companies knew an EU referendum was coming but did not yet know the date.

In total, 102 UK companies and foreign-owned subsidiaries and 65 companies from across India, China, Japan, Australia, Canada and the US were interviewed.

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