UK Business Threatens to Leave

Rob Mackrill - Thu 08 May, 2008

Increasingly businesses are threatening to leave the UK adding further pressure on a weakened government.

The number is 5. And there it stays until next time.

That’s 5% - the UK base rate which has been left unchanged today. As expected. Mervyn King and crew continue to toe their way gingerly along the tightrope so as not to fall into recession to the left of them or rampant inflation to the right. But what we’ve been thinking about today here at the DR towers is...price...

Price is the centre of our free market universe. It has long had homo economicus wrapped around its little finger. In good times it is his wet nurse, in bad times his school Matron. When price goes up it’s like a wrap on the knuckles of our spending hand. When it goes down, it has us splashing out on stuff we probably don’t even need. Okay it’s not as simple as that. Some things are stickier than others. Some things all but the weirdest ascetics can’t avoid consuming whatever the price. Such “unavoidables” would include those items rising most aggressively now - food and fuel. Their prices keep going up but we still have to eat, drink and get to work. But as prices change so behaviour adapts to it. Cause and effect.

Price rises get homo economicus adopting his Rodin’s thinker pose. How to manage these higher costs and still have some fun when our dwindling pay cheque is barely keeping up with even the diluted inflation measure? Well for those of us fortunate enough not to live in say North Korea or, more topically and tragically, Burma - there are choices. And if you add in the idea of product substitution (don’t buy top of the range get the next one down or a cheaper alternative that does the job) and mix it up with the cause celebre – globalisation and pretty soon homo economicus comes up with some innovative solutions...

Various random examples spring to mind. A dearth of NHS dentists and expensive domestic treatment might lead some to check out dentists on a trip to Warsaw...or in your editor’s case...Montreal. Others go to France for medical treatment. Those who can’t afford a ski chalet in Val d’Isere may find something more in budget in Bulgaria. Carefully calculated Belgian residence has been a popular tax refuge those selling businesses with the intention of avoiding capital gains tax.

In another example, The Sunday Times carried a piece on one Bill Wiggins who sends his children to South Africa to be privately educated. It’s better value claims Mr Wiggins, meaning it’s presumably cheaper to pay in Rand with a favourable exchange rate than suffer years brutal inflation-busting fees in British pounds. In passing, the name rang a bell. Your editor wondered whether that would be the same Bill Wiggins who a few years back achieved brief notoriety for a much publicised fling with actress Joan Collins. The nickname “Bungalow” springs to mind – as in nothing much upstairs.

But I digress. Coming back to our homo economicus, we find its corporate equivalent has been doing some thinking too. Britain is becoming progressively a less tasty tax haven for business than it once was. Big business has taken notice and umbrage too. Taxing the “non-doms” and increasing capital gains tax by 80% from its lowest rate have raised hackles and dented the UK’s reputation.

Now new government proposals to tax companies on foreign profits have got an increasing number looking to exchange their UK HQs to other more welcoming shores in the global village. Countries such as Ireland or Switzerland are popular alternatives. A quick check of business tax rates gives an indication why. UK corporation tax this year starts at 21% and rises to 28% for profits over £1.5m. In comparison, Irish corporation tax on trading income is a mere 12.5%. Switzerland’s system is more complex and taxed at three levels - federal, canton and municipality - but let’s face it, we’re talking the natural home of fiscal competition, or more colloquially tax haven.

The number of UK-based companies either moving or considering it seems to be growing daily. Shire Pharmaceuticals was the first but it has been joined by ad giant WPP, publishing group United Business Media and yesterday, fund manager Aberdeen Asset Management and Big Pharma company Glaxo SmithKline. The Times reports another fund manager – Old Mutual as “looking for a foreign tax haven”.

This is beginning to look like turning into a flood and the threat of this erosion to the taxpaying base only adds to the woes of a Prime Minister besieged with problems heading up the now cash-strapped and long-in-the-tooth New Labour project. Business is not shy of leveraging their negotiating position against a government weakened both economically and politically. It will be interesting to see if this is sabre rattling or something more serious. But then when a company such as British American Tobacco can make a £3bn profit last year and pay not a penny in UK tax, maybe we’d be little worse off without them.

Regards,

Rob Mackrill
The Daily Reckoning