Julia Irvine 15 May 2018 11:22am

UK reduces tax competitiveness gap with Ireland

Ireland is still seen as having the most competitive tax regime in the world although the UK is beginning to close the gap, research from KPMG reveals

The UK is now only 12% behind Ireland, compared with 15% last year, and has consolidated its lead over other countries as the favourite tax regime of business services organisations.

It has also extended the overall gap over third-placed Luxembourg from 5% to 11%, thanks to the UK government’s long-term commitment to a stable and competitive tax regime.

But it’s not all good news for the UK. KPMG’s 11th annual tax competitiveness report points out that, while the UK is viewed by UK-based companies and foreign subsidiaries as second only to Ireland in terms of attractive tax regimes, it is not so popular among non-UK companies.

When asked which three countries they thought had the most competitive tax regime, UK-based companies chose Ireland (73%), the UK (62%) and Luxembourg (42%). This compares with non-UK companies which mentioned Ireland most (48%), followed by the Netherlands (41%) and Singapore (40%).

Non-UK companies placed the UK joint fifth (33%) with Switzerland with Luxembourg in fourth place (34%).

KPMG says that its previous research indicates a strong correlation between perceived tax competitiveness and the attractiveness of a country for foreign direct investment (FDI). Ireland is well in the lead with 30% while the UK is in second place with (16%), the Netherlands third (14%) and Singapore fourth (10%).

The Big Four firm says that the UK’s continued attractiveness as an investment destination is something to be “celebrated”, with the percentage of UK businesses firmly committed to keeping their tax residence in the UK now at an all-time high.

“But as with last year’s survey,” it says, “among all respondents there are more firms looking to move other activities aside from tax residency (these include regulated activities, regional head office, intellectual property, manufacturing, group services company and finance/treasury activity) out of the UK rather than into it.

“The exceptions are holding companies and investment holding companies where significantly more companies are looking to relocate these activities into the UK in 2017, compared with 2016.”

The research finds – not surprisingly – that Brexit is the most significant concern (42%) among businesses considering investment at the moment, with questions over continuing frictionless trade and ongoing regulatory equivalence at the top of the list of worries.

Other factors that might affect their investment and activities in the UK over the coming year are the ability to attract and retain talent (19%), the reduction in headline rates of corporation tax (15%) and investment in infrastructure (14%).

KPMG UK’s head of international tax Melissa Geiger said that businesses want stability and predictability from tax regimes, not just attractive rates. “The UK has largely maintained a business-friendly tax regime compared to many of its rivals.

“This survey shows that once a business starts operating in the UK, they tend to recognise the attractiveness of the country’s economic and tax environment and are likely to keep their base here.

“That stickiness is important. The tax rate in the UK is low and competitive, but is also being paid, which is good news for the Treasury.”

She added that it was difficult to quantify as yet the impact of the US tax reforms on the international business world. “Organisations are still understanding the implications on their operations, and we may yet see governments considering policy responses as they seek to remain attractive to foreign investment.

“Brexit complicates that picture for the UK and the challenge for policy makers is to balance these tensions and create an environment that harnesses innovation and growth for the future”

The firm has come up with a number of suggested actions that the UK government could take to ensure that the UK remains an attractive place to do business internationally.

They include: a Brexit agreement that allows for maximum free movement of labour and access to the single market; greater investment in skills, education, infrastructure, regional transport links and enterprise zones; and a continued commitment to providing a stable, simple and competitive tax and economic policy.

The research is based on 135 conversations with senior tax decision-makers from a range of large companies, with a turnover of at least £100m, from the UK and the rest of the G7 nations.