Imagine you are the European boss of a US financial firm based in Canary Wharf. Post Brexit you are wrestling with whether to shift more jobs from London into the EU. Since the start of the year it has become more difficult if not impossible to provide some services to EU clients from the UK and you are getting pressure from local EU regulators to move more resources into their patch. Maybe you should. After all, the costs are pretty attractive compared with London.
Then you listen to Rishi Sunak’s Budget. You hear him talk about Lord Hill’s review of the listing rules designed to encourage more technology companies to go public in London. Sounds good.
The Chancellor also commits to improving the visa regime for skilled workers as recommended by Ron Kalifa’s review of UK fintech. Tick. You like some of the language around green growth, though Sunak ruins it by proudly declaring that he is scrapping the planned increase in fuel duty.
But then he drops the bombshell. In two years’ time the rate of corporation tax will jump from 19% to 25%. You do the maths. That means the tax bill for your UK business will rise by almost a third. Suddenly the decision over whether to move those jobs to Paris becomes a lot clearer.
It would be better, in a way, if you ran a bank. Banks already pay an 8% tax surcharge, which Sunak says will be reviewed to ensure that the combined rate on UK banks doesn’t increase “significantly” above its current level. But that still leaves hundreds of City firms facing a big hike. Including yours.
Sunak insists that the UK would still have the lowest headline rate of corporation tax in the G7. Yet the Institute for Fiscal Studies says that once you take allowances into account the UK tax rate will be relatively high. In any case, such a big increase must affect the relative attractiveness of the City as a place to do business.
As hedge fund mogul Sir Paul Marshall wrote in The Times ahead of last week’s Budget: “Anybody who works in business and investment understands how important even marginal differences in corporate tax rates are to decisions about company domicile and investment.”
The government needs to raise tax somewhere, of course. But there were options, said Marshall, that would not hit inward investment, such as scrapping the upper income band relief on pension contributions.
And we are not talking about a marginal change. Paul Johnson, head of the IFS, described it as a “huge increase” that will be “risky” for the economy as a whole. For the City, with its highly mobile businesses that are under unprecedented pressure to move, it looks like a huge own goal.
According to the independent Office for Budget Responsibility, business investment will be brought forward by the temporary “super-deduction” for investment in plant and machinery (of limited use for most City firms) and then fall back below its previous forecast by 2026 because of higher corporation tax.
So much for claims about a Budget for investment. City lobby groups were understandably cautious in their reactions. They are keen to encourage the government’s newfound enthusiasm for the City after the woeful neglect during the Brexit negotiations. And they hardly want to highlight negatives in the fight to attract international investment.
Miles Celic, head of TheCityUK, said that “changes to corporation tax need to be matched with a commitment to streamlining and simplifying the UK’s tax code” as if the one could possibly compensate for the other.
There is no disguising that the tax rise undermines the Chancellor’s plan to launch a post-Brexit fightback by the City.
His hope must have been that the focus would be on Lord Hill’s review, which provides a well-judged blueprint for reform of the listing rules. It also offers ideas to highlight the government’s new commitment to the City.
Hill has called on the government to deliver an annual report to parliament setting out the progress made on improving the City’s competitive position.
He also recommends that the Financial Conduct Authority should be given a new objective to take account of the impact of its actions and rules on the attractiveness of the UK as a place to do business.
On the listing rules, Hill has come up with a balanced package that should encourage more companies to float in London while maintaining the UK’s high standards of regulation.
But it is hard to believe that the benefits for London as a financial centre will come close to offsetting the potential damage caused by the tax hike.
So, looking from Canary Wharf, how would you assess the Chancellor’s performance? On balance, I think you would probably conclude that it was an excellent Budget for the financial sector — in Paris.
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