Is the UK really becoming a tax haven?

31 January 2017

George Bull

It's difficult to know where to start, but spelling out what a tax haven is and what it is not might help.

There is generally no agreed definition of a tax haven, but it's widely accepted that a tax haven is a jurisdiction that offers low tax rates to companies or individuals, accompanied by the facility to accumulate profits and maintain investments in conditions of financial secrecy. So where does that leave the UK?

Under the former Chancellor of the Exchequer George Osborne, Great Britain developed a conscious strategy of offering the lowest corporation tax rates in the G20 group of developed nations. In the course of this, corporation tax rates dropped to their current level of 20 per cent with further reductions promised which would take the rate down to 17 per cent. While such relatively low corporation tax rates might be superficially attractive to business, companies were quick to point out that George Osborne's tactic had been to reduce headline tax rates while simultaneously adding on additional costs, such as pensions auto-enrolment, the living wage and the apprenticeship levy. To those companies at any rate, the UK hardly looked like a tax haven.

In his November 2016 Autumn Statement, the current Chancellor of the Exchequer Philip Hammond confirmed his predecessor’s commitment to a 17 per cent corporation tax rate. While this will still not give Great Britain the lowest corporation tax rate in the G20 league table – a position occupied by Northern Ireland with a rate of 12.5 per cent – businesses are keeping their fingers crossed that fewer strings will be attached to these low rates by the new Chancellor.

At the risk of stating the obvious, both Chancellors hope that by offering low corporation tax rates they can attract international businesses to the UK which would invest here, boost GDP, create jobs and of course pay their taxes. For businesses, tax is much more than corporation tax. Tax includes VAT, PAYE (both income tax and NIC), business rates and indirectly the taxes paid by bondholders and shareholders on distributions they receive. So, Treasury thinking goes, low corporation tax rates translate into economic growth, prosperity and, yes, enhanced tax receipts.

But is that enough to make the UK tax haven? We think not. The whole purpose of encouraging companies to come to the UK is to invest here, not to accumulate profits and maintain investments in conditions of financial secrecy. While other countries in the G20 may be able to demonstrate some merit in their arguments that the trend towards reducing corporation tax rates amounts to harmful tax competition by the UK, the UK is leading the way in financial disclosure and the encouragement of open investment. The label 'tax haven' simply will not stick.

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