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The Bourne Agenda: Is the UK's tax regime losing its sparkle?

The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

The success of Treasury’s aim “to enhance the competitiveness of the UK tax framework, while being broadly revenue neutral” does not appear to be supported by some of our multinational companies. Yesterday, Shire made the decision to introduce an Irish resident holding company due to what is believed to be concern about the uncertainty of how the UK intends to modify the system of taxing foreign profits. The CBI director general, Richard Lambert, commented that they are “particularly worried that an uncompetitive corporate tax system is spoiling the UK’s attractiveness as a place to do business”.

This perceived “uncompetitive” nature of the UK tax system is not only down to tax rate; the difference between the Irish and UK headline tax rates is obviously a factor, but what could be more of a catalyst for a move of company domicile, is the possibility of additional anti-avoidance measures which could result in higher tax and compliance costs. This is hinted at in Shire’s press release describing its need to recognise it is “a global company” and to see “where the best place for a global company to be tax resident is”.

Adding to the debate over UK policy, the possibility of another option is emerging; the European Commission (EC) is pushing forward with its idea of the European Common Consolidated Corporate Tax Base (CCCTB). This Directive is due to be proposed in September 2008, with the possibility of implementation by 2011.

The EC has been working towards solutions for removing direct tax inefficiencies to the workings of the internal market. These inefficiencies affect businesses having to deal with a different tax system in each member state when undertaking cross border activities within the EU; the CCCBTB is its answer.

A CCCTB will allow businesses to opt to file their corporate tax return information for all EU countries using a common set of rules, with profits and losses being allocated to individual countries using a formula based approach.

Eligible companies resident in the EU, and the permanent establishment (PE) of eligible companies not resident in the EU, may opt for the CCCTB. EU Resident companies would be subject to tax on their worldwide income subject to double tax relief, whereas non-resident companies would be subject to tax on business income attributable to an EU PE.

Consolidation of the tax base would free companies from having to comply with intra-group transfer pricing rules and permit loss consolidation in a similar way to many internal regimes.

If implemented, the CCCTB could potentially give businesses operating across Europe a significant saving in tax compliance costs, and make it easier to compare the corporate tax cost of locating operations in different parts of the EU. Amongst other things, it offers a reinstatement of relief for buildings depreciation, at 2.5%; in contrast to the recent abolition of Industrial Buildings Allowances (IBAs) in the UK.

Of course, it is the uncertainty surrounding whether or not the CCCTB will be implemented that may be its stumbling block in attracting companies to opt under it. Tax directors require certainty when planning for future liabilities. Any doubt surrounding the CCCTB’s adoption by the EU immediately undermines the attraction its structure encourages. Additionally, the manner in which HM Treasury would choose to incorporate the CCCTB Directive into UK tax legislation is also undecided.

The prospect of the CCCTB for the UK is an interesting one; it could encourage companies to stay tax resident to the UK but opt for being taxed using the CCCTB. On the other hand, with the option of the CCCTB, the Government’s power over UK tax legislation is reduced. Whether or not the CCCTB ever comes into effect or not remains to be seen, but it certainly reminds Europe about what core values should drive the development of tax systems; simplicity and equality.

Bourne Business Consulting LLP, based in London, was named Best Tax Team in a Boutique Firm as part of the Lexis Nexis Taxation Awards 2007. For more information, contact Bourne on 0207 960 2730 or visit www.bournebc.com.