A taxing question – How much business do you want to keep in the UK?

The Treasury is busy making another fine mess. Larger companies are asking their tax advisers if they could now save serious money by moving their head offices out of the UK. The sales teams in Ireland, Switzerland and the Netherlands are in overdrive contacting UK companies to lure them away with their much better tax offers. They are greatly helped by the Treasury’s decision to consult on the idea that multinationals in the UK should also pay tax on their overseas earnings! Boy are they celebrating in Dublin and Zurich – it’s their dream come true, the best knocking copy they have had on the UK for 30 years.

To many Labour MPs it’s a simple question of social justice. They live in a world where big business is owned and run by the modern equivalent of Victorian mill owners – fat cats who live and earn in the UK, who will always stay here, and who should be taxed to the hilt to teach them a lesson for being bad employers and for making so much money. If any of them use smart lawyers and accountants to move offshore, then they must be taxed for doing that and hauled back onshore so we can all benefit from the money they have to cough up.

As an MP who also needs to be re-elected I can see the natural attractions of pandering to people’s jealousy by attacking the super rich, and taking so much money off them that I could offer good public services at little cost to constituents on average pay and below. Who wouldn’t like that apart from a few super rich? The problem is it is not how the modern world works. There are not enough super rich who will stay in the UK and pay so much tax that we could make much difference to the tax all the rest of us have to pay. The great multinationals are not owned by a few modern mill owners in London and Birmingham. They are restless and footloose global companies owned by millions of shareholders, some big and many small. There is no substitute to being honest with people, and telling them that if they want more public money spent they and the neighbours have to pay it to the Treasury first.

Ironically Labour’s demonology is directed more against the managers of large multinationals than against the owners. The Chairmen and CEOs earn big salaries and evoke Labour hostility for their pay rates, but usually they own very little of the company they work for. The owners are you and me through our pension funds, trade unionists, small savers and academic institutions of the USA through their big pension and endowment funds, and a host of owners world wide from charitable funds and sovereign funds through to rich individuals. The shareholder list of a large UK based multinational is far more ethnically diverse and global than the UK voters list itself – something that should appeal to New Labour. Collectively these shareholders have the power to appoint, remunerate and dismiss the directors and managers, who are but hired hands.

Because these great companies are truly public companies no one person or group is in charge. A CEO may be powerful for a bit if he or she delivers good growth in earnings and dividends, but ultimate power is spread and is open to company democratic pressures. Threatening such companies with higher taxes in the UK is therefore potty. The professional managers want to keep their jobs. If there is an easy way of cutting the tax bill by moving to another respectable country that offers lower taxes than our own these managers have to look at it. If the atmosphere towards enterprise and dividends becomes too hostile in the UK and they are still based here they might be subject to shareholder anger. The shareholders and their representatives are unlikely to turn round and say we want to pay more tax and want to stay in a country that is moving against enterprise, especially bearing in mind how diverse the shareholder lists are.

When I wrote the Conservative Economic Policy review the Committee and I drew attention to the notable deterioration in the UK’s tax competitiveness. Much of this has come about because other countries have improved their tax system so much to help enterprise. They are continuing to do so. Both main UK political parties seemed to take the message on board. The Conservatives are looking at moving to 25% Corporation Tax from the 30% we commented on. The Labour government responded by moving the headline rate down to 28%, a move in the right direction. Unfortunately Labour bought into part of the idea – the UK must have low rates it can use to ward off foreign competition – but not into the rest of the proposition – that we need lower taxes overall, and simplicity and consistency in the system.

Businesses looking at coming to the UK – and businesses asking whether they should stay – want to know that they are not paying a big penalty in the form of higher tax for doing so. They also want to know the system will be stable. By this they mean they want to know that having arrived they will not be faced with changes that put taxes up. They will not complain if the taxes are cut.

There is one simple way for the Treasury to staunch the flow of businesses heading for the exit. They should announce they have no intention of changing the system of taxing foreign profits, having consulted. They should add that they are open to ideas for lowering business tax rates, and that future change will be in that direction. Such action will increase the amount of revenue they collect from business, by keeping more companies here to tax, and attracting more companies here to tax. The way Labour is going, they will discover that footloose international businesses are no longer “British” owned by Tory voting mill owners. They are what they say they are – fast moving successful suppliers of the global market, run by international managers on behalf of an extraordinarily diverse range of owners who feel no loyalty to the UK.

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13 Comments

  1. Matthew Reynolds
    Posted May 5, 2008 at 11:04 am | Permalink

    I think that we ought to devolve responsiblity for corporate taxes to the Scottish Parliament , Welsh Assembly & NI Assembly . The aim being to give them the power to become Celtic Tigers a la Eire while bringing in 10% corporate tax flat rate in England . The Parties running Scotland , Wales & Ulster would be forced to go down the right-wing path of downsizing their state sectors to avoid losing out in terms of tax competition with England & Eire . As a result of politics lurching right-ward in the Celtic terrirtories that would make them more favourable to the Conservatives as the Tories could campaign against unemployment in election to those devolved bodies by pledging the corporate tax cuts needed to get more business investment . Those areas are poorer than England as their government sectors are bigger & my plan could be a catalyst to making them smaller . Devolving power like this would shoot down in flames the allegation that the Tories where anti- devolution while forcing our opponents in Ulster , Scotland & Wales to embrace Thatcherism as either they would have to copy England or be replaced in office by a pro- tax cut Conservative Party . In this context why not let Ulster , Scotland & Wales decide their own CGT system while axing CGT in England ( with capital gains taxed as income for the first two years & leaving them free from tax after that ) ? This agenda of decentralisation would force our opponents in parts of the UK unfavourable to use to move to the right or allow the possibility of a Tory recovery . This would also address John Redwood’s concerns about high taxes harming the UK economy.

  2. Matthew Reynolds
    Posted May 5, 2008 at 12:04 pm | Permalink

    I think that we ought to devolve responsiblity for corporate taxes to the Scottish Parliament , Welsh Assembly & NI Assembly . The aim being to give them the power to become Celtic Tigers a la Eire while bringing in 10% corporate tax flat rate in England . The Parties running Scotland , Wales & Ulster would be forced to go down the right-wing path of downsizing their state sectors to avoid losing out in terms of tax competition with England & Eire . As a result of politics lurching right-ward in the Celtic terrirtories that would make them more favourable to the Conservatives as the Tories could campaign against unemployment in election to those devolved bodies by pledging the corporate tax cuts needed to get more business investment . Those areas are poorer than England as their government sectors are bigger & my plan could be a catalyst to making them smaller . Devolving power like this would shoot down in flames the allegation that the Tories where anti- devolution while forcing our opponents in Ulster , Scotland & Wales to embrace Thatcherism as either they would have to copy England or be replaced in office by a pro- tax cut Conservative Party . In this context why not let Ulster , Scotland & Wales decide their own CGT system while axing CGT in England ( with capital gains taxed as income for the first two years & leaving them free from tax after that ) ? This agenda of decentralisation would force our opponents in parts of the UK unfavourable to use to move to the right or allow the possibility of a Tory recovery . This would also address John Redwood's concerns about high taxes harming the UK economy.

  3. Bazman
    Posted May 5, 2008 at 12:53 pm | Permalink

    Often the companies that leave do not pay a lot of tax here anyway and often will go to extreme lengths to avoid any tax.
    If a company in Britain is making money, but not giving any benefit to the country, then why should they be allowed to operate?
    It is a real problem across the world on how they should be taxed. Often it seems to me that the Tory party only wants them to have it all their own way and help them in their race to the bottom with the average worker paying for the few with low wages benefits and conditions.
    Make no mistake these companies are not out to help anyone they are only in business for the interests of a few and not necessarily the shareholders. Who seem to be whacked quite often.
    These tax havens abroad and here are like pirate ships plundering the worlds wealth. War against these countries needs to be declared. Their wealth is funded by often by drug money and theft by third world dictators. Draining wealth from health, social security systems and infrastructure projects across the world.
    Did you know that by using a company like lloyds you can set up your own bank in Lichtenstein? For less than five grand, you could set up your own bank, deposit funds into it and start handing out loans and credit cards to customers. Mind-boggling, but true. So if you want to cook up the figures or wipe out your tracks, what better way to do it than open your own bank? And this has been going on for decades. It's impossible to predict how many people are sitting with billions in their own personal offshore banks.
    The German assault on tax dodgers who stash cash in Liechtenstein was a good start. Europe and the rest of the world should follow suit using similar tactics. They are fair and fat targets, easy money for the state and politically acceptable to the voter.
    The tax of labour and consumption is not enough as this just attacks people who cannot move or are not rich enough to pay fees.

  4. Tony Makara
    Posted May 5, 2008 at 1:41 pm | Permalink

    Government should provide significant tax relief to British owned companies and particularly those that look to supply our domestic market. If government makes it profitable to supply the British market then we will be less reliant on imports and less prone to the higher-interest rates needed to shore up Sterling to prevent high-street inflation from entering the country on the back of imports. This is particularly important as far as food is concerned. We are already starting to see shopping bills increase as the cost of EU food imports increases as the purchasing power of Sterling declines. The more we can produce for ourselves the greater our level of food security will be.

    The Labour government do not understand that to punish profit is to punish incentive. An entrepreneur who can make more money is going to want to invest more, creating more jobs, wares and services. More people working means more people contributing to the economy rather than taking from it. People buying more, saving more, thus adding to the wealth of our nation. On the other hand an entrepreneur who can't make money will not invest, will not have the profit margins that encourage risk, the result being no jobs created and no extra wealth for the economy. The message to entrepreneurs should be, go forth, make money, muliply your wealth, by your wealth others will benefit too.

  5. Stuart Fairney
    Posted May 5, 2008 at 3:51 pm | Permalink

    Tony, what is a British owned company?

    This isn't me being ironic, I would like to know what you mean.

  6. niconoclast
    Posted May 5, 2008 at 6:32 pm | Permalink

    The conservatives will propose a corporation tax twice the rate of Southern Ireland's?Why such a niggardly,tokenistic reduction?

    Reply: You tend to get to lower taxes through stepped reductions.

  7. Tony Makara
    Posted May 5, 2008 at 6:34 pm | Permalink

    Stuart Fairney, ideally British owned should mean that the company is owned by British entrepreneurs and shareholders. Of course where no corresponding company exists in our country to supply a given niche area then we should remain open to foreign investment, however ideally we should be trying to build our own economy rather than acting as a surrogate for foreign capital, which is open to flight when economic conditions are not favourable. A British economy built by British capital offers more security, but of course where the will and inclination to invest does not come from the British entrepreneur then we shouldn't close the door on those who do want to invest here. My argument is that government must make British investment, particularly in relation to supplying the home market, profitable and free of regulation.

  8. Bazman
    Posted May 5, 2008 at 6:40 pm | Permalink

    He means the British car industry, which is quite large and successful. No chance of buying an affordable 5 door family car though.
    The trickle down effect or the 'sparrows and oats' theory has been disproved time and again. A lot of cash ends up abroad or in banks from these 'entrepreneurs' and Britain ain't called Treasure Island by large companies for nothing. They are here for booty and plunder for sure. When they have destroyed the country they will then declare it bad for business and move somewhere else. Or at least when the grants have been used up.

  9. Acorn
    Posted May 5, 2008 at 6:57 pm | Permalink

    Don't forget that as a UK domiciled company, you are required to be also an employee income tax collector; national insurance tax collector and an immigration status inspector.

    Who was it who said, "… the only purpose of a business is to make profits …"?

  10. mikestallard
    Posted May 5, 2008 at 8:50 pm | Permalink

    I am worried about knocking big business myself. OK the bosses are in it to make money. So is the Stock Exchange. So, ultimately, is everyone. Would you work for nothing?
    But making money does not rule out philanthropy. Bill Gates?
    Large companies have large offices and large staffs. These people need to be paid and they need to eat and buy clothes and things. Where do they do this? Where do they have that haircut or buy that watch? Call this the trickle down effect, or what you will, it has got to happen.
    I agree very much with the Celtic Tiger idea.

    But, let's face it, this government is not going to stop fiddling with things it does not understand. It is not going to reform. It really believes in what it is doing.

    And, of course, what it is doing is going broke fast. Hence the need for taxing everything that moves – and more.

  11. Bazman
    Posted May 5, 2008 at 10:23 pm | Permalink

    philanthropy? Don't make me laugh! Most philanthropists have never done a days work in their lives. Warren Buffets fortune would support the American health care system for about a year. Buying a watch and having a haircut will not pay a nurses salary. Conservatives need to get real.

  12. Rose
    Posted May 6, 2008 at 1:14 pm | Permalink

    It can never be explained enough to people, especially in the BBC, that the flatter and simpler the tax regime, the higher will be the take, and the cheaper the cost of collecting it.

  13. Mandeep
    Posted May 29, 2008 at 2:40 pm | Permalink

    The argument about democratic ownership of companies benefitting everybody from corporation tax cuts, made by John in his article fails to declare a vital statistic ! What percentage of the businesses in UK are publicly owned and what percentage are privately held? Where the businesses are publicly held how much of their equity is a free float rather than a few !0's of percentage held by the public and rest held by wealthy family owners or trusts etc.

    This should give a truer picture of will the corporation tax cuts benefit the masses at large?

    How many of the small shareholders can truly influence the voting in annual board meetings in reality? Aren't the pensions and fund managers and the brokers and investment bankers who probably vote Tory due to their income percentiles scratching each others backs while voting in remuneration votes at AGM's and giving each other business/benefits, while laying the cost of operations (gentleman's clubs anyone) on the joe blog shareholders who has hardly any clue.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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