Is Britain open for business or not?
Britain’s tax rate is neutral at best when it comes to attracting investment, and as international competitors up their game, we may need to go further just to stand still, says Tim Sarson
How attractive is the UK as a place to invest? It’s confusing, isn’t it? In the last few weeks we’ve had a procession of US technology giants announcing multi-billion dollar Artificial Intelligence (AI) datacentre projects. But in the same month big pharma firms reported that they are freezing planned developments here. These are just the most headline grabbing of a constant stream of stories that raise the question, are we open for business or not?
I’m often asked this. I’m a tax specialist so I can only really answer in any depth about our tax system, but it’s impossible to do so without speculating on the wider context.
Earlier this month, the Resolution Foundation published a sobering report. The main message: UK household living standards have stagnated in the last 20 years. This is largely due to our productivity problem and, in particular, the lack of private sector investment. Our output per worker is now 24 per cent below the USA, and 20 per cent and 13 per cent behind Germany and France respectively. According to the ICAEW UK capital investment collapsed during the Covid pandemic, recovered by 2022, but has since trundled along and if anything fallen a bit.
What’s behind this? Is the rest of the world simply turning its attention elsewhere? Or are we Brits a nation of asset sweaters, reluctant to dip into our pockets today even if that means lower returns tomorrow?
We may still rank the highest destination for investment in Europe according to UK government data but inward investment has nevertheless collapsed from a peak of just under £200bn before Brexit in 2016 to the low £10s of millions in the last set of data available for 2023
We may still rank the highest destination for investment in Europe according to UK government data but inward investment has nevertheless collapsed from a peak of just under £200bn before Brexit in 2016 to the low £10s of millions in the last set of data available for 2023.
Unpicking this is hard. The question I’ve been trying to answer is whether tax policy can help or hinder us in closing the productivity gap.
Ireland, the obvious outlier
There’s an obvious outlier from the global investment trend in the last two decades, and that’s Ireland. It has seen Foreign Direct Investment (FDI) soar along with Gross Domestic Product (GDP). Yes, it’s often hard to pick out the tax signal from the noise but here’s a pretty compelling case study, right next door. Ireland has a 12.5 per cent corporation tax rate. They’re not going there for the weather.
So, as with the previous example, we know that tax can influence trade and investment, especially from US multinationals. During the past decade, Europe attracted 57.3 per cent of total US global investment. In 2021, the total stock of US FDI in Europe was $4 trillion, and in that year US FDI in the UK alone was over eight times greater than such investment in China, according to the John Hopkins Foreign Policy Institute. We know from years of news coverage, case law and the words of companies themselves, that tax differentials were a factor in this.
But these investments too are slowing down, and they could well start to seize up altogether. The Federal US tax rate is 21 per cent; add in state taxes and you’re in the mid-20s. But with the right pattern for a multinational business it can be significantly lower, well into the mid-teens.
So, the bar for using tax to attract business investment just got higher. A few months ago, I wrote that 25 per cent is now the standard rate for most countries. At best our rate is neutral, but we have to rely on other features of the system to attract investment: the R&D credit system, the patent box and our full expensing policy. It’s possible we may need to do more just to stand still.
The thing is we’re not that far off a pretty attractive tax system for multinationals. We have a fairly stable regime, a tax authority that’s user-friendly by international standards, and a very wide network of tax treaties with our trading partners. A few tweaks to our incentives regimes, such as extending the patent box to cover innovative unpatented technology and we could be a player.
Chasing global capital is only half the story though. With our domestic industries it’s not a question of where they’re spending money, it’s whether they’re spending money at all. How do we get them to open their wallets?
The last government attempted this with its full expensing policy. When companies buy assets they spread the accounting cost over several years, but with full expensing they get the tax relief all in year one. A nice idea if you’re cashflow sensitive, and a profitable taxpayer, and if you care more about cash tax than accounting profit. Not so much if you don’t. It’s too early to tell what effect this has had, but at least they gave it a try.
There are other tools available to government. We could go for super-deductions again, for example, but this time give enough notice for businesses to adapt their capex plans. We could, and should, make some tweaks in our personal tax system too. But all of this costs money.
A combination of causes means there needs to be a combination of solutions to get Britain investing again. There are opportunities to tweak the tax system, but it’s also about the cost of debt; our regulatory environment; the state of public infrastructure; and most of all, the perceived stability of our economy and currency, and confidence in the future.
Tim Sarson is head of tax policy at KPMG