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The tax landscape is changing:Repair? Revitalise? Building a business tax blueprint for the UK post-Brexit

The better the question. The better the answer. The better the world works.

In this report ...

Chris Sanger EY UK&I Head of Tax Policy020 7951 0150 [email protected]

Tim Steel EY UK&I Tax Markets Leader020 7951 1149 [email protected]

2Building the blueprint

3How open is open?

5Corporation tax is not the only rate

7It’s all about the base

12Investing in tax administration

14 Setting strong foundations

16 Making it happen

Since the UK voted to leave the European Union, the Government has stressed its commitment to keeping the UK open for business. However, aside from a headline grabbing discussion of further reductions in the rate of mainstream corporation tax, what has been missing from the commentary to date is any sense of a strategic approach to the impact that Brexit will have in terms of the attractiveness of the UK and, more specifically, the tax system.

Executive summary Building a business tax blueprint for the UK post-Brexit at a glance

In reality, the changes that businesses are telling us will make the most difference are unlikely to create headlines, so in the weeks, months and years to come, we would urge the Government to focus instead on setting a framework that brings the certainty that businesses need.

We think it is time for the Government to develop a new tax blueprint for the UK and at the heart of our proposals is the view that the Government should be looking beyond the mainstream corporation tax rate if it wants to attract business to the UK and retain those that are already here.

We tested our thinking through a survey of tax and finance professionals from organisations headquartered both in the UK and overseas. Finally, we discussed our findings with a panel of FTSE 100 tax directors.

In terms of keeping the UK open for business from a tax perspective, the conclusions are clear:

►Cutting tax burdens other than the corporation tax rate could have a more significant impact than a rate change in isolation. With uncertainty around indirect tax and, in particular, customs tariffs a real concern for many UK businesses, the Government should look beyond the obvious rate changes.

For many businesses, tackling the tax base represents a more effective long-term strategy. This is about giving tax relief for all costs that businesses legitimately spend — capital expenditure, interest, etc. — and taxing them on the profits they actually make.

At the heart of all the comments we received from tax directors was the need for certainty. For them, setting out, communicating and actually implementing tax law in line with a clear plan is critical to creating an attractive business environment. This should encompass effective administration, providing clarity and certainty.

There is real value in getting the 'open for business' message right — particularly in terms of providing a solid basis from which to rebalance the economy and facilitate inclusive growth. However, the cost of getting it wrong could also be significant. The changes made to the UK tax system over the past few years have built up a huge momentum, but if the Government fails to build on that in the post-Brexit landscape, we could lose considerable ground in the global marketplace.

That market is moving at an incredible pace and businesses need to be agile in response. The tax system should support that agility. In a world of change, there is an enormous opportunity to evolve but one thing is clear — standing still is not an option.

What indirect tax measure would have the most significant impact in terms of keeping the UK open for business?

Additional key findings

3. Invest in the administration of the tax system

Which of the following would make the most difference to your business in terms of positive impact?

Which of the following guiding principles should the Government focus on?


A commitment to maintaining and reinforcing the UK's double tax treaty network

Maintaining a mainstream corporation tax rate target of being the lowest of the G20

Implementing zero tariffs on exports to the rest of the EU

Slowing the introduction of the UK’s response to BEPS to align to the majority of countries?

Obtaining zero tariffs on exports from the UK

Responsive and constructive

clearance rulings

More joined up policymaking

between business and Government

Effective and timely dealing with enquiries/

audits

Slowing the introduction of the UK’s response to BEPS to align

to the majority of countries

74% 76%

37% 43%

74% 69% 67% 68%

UK HQ Non-UK HQ

UK HQ Non-UK HQ

55%

52%

44%

40%

37%

Measures to support UK businesses suffering in relation to speed of VAT recovery

50%

A cut in the rate of VAT to 17.5%43%

Which of the following would be most useful for your business in terms of the tax base?

2. It’s all about the base

A deduction for genuine business interest expenses

A deduction for tax depreciation on all capital expenditure (including industrial buildings, offices, etc.)

Providing more generous ratesfor R&D tax credit

A specific deduction for amortisation of all intangible assets, including goodwill

71%

50%

41%

37%

What would have the most significant impact in terms of making the UK a more attractive place for your business to invest?

Reducing the employment tax burden

Cutting the mainstream corporation tax rate

Lowering the higher rateof income tax

Cutting the rate of VAT

64%

43%

41%

39%

1. Corporation tax is not the only rate

41%Reduced customs duties on the import of some preferential goods

p5

p6

p7

p15

p12

p15

Building the blueprintIn the face of a new era following the UK’s vote to leave the European Union (EU), one of the Government’s first messages was to reaffirm its commitment to keeping the UK open for business.1

In the past, the mainstream corporation tax rate has been a key factor in showcasing the UK as an attractive location for investment and, before he stepped down as Chancellor, George Osborne gave indications that a further rate reduction was planned.2

But with an opportunity to take a fresh look at the tax system, is it right to focus just on the tax rate? If the key objective is to bring business investment to the UK and maintain those that are here already, wouldn’t the best starting point be to ask what businesses really want and/or need?

There are key building blocks to any tax system and the challenge for the Government will be in finding the elements that fit most effectively together to form a strong foundation from which businesses can operate. In 2010, the Corporation Tax Roadmap identified four key ways in which the corporation tax system impacts on business. While the rate was a factor, the tax base, tax administration and tax policy-

making were also seen to have an impact. This report shows that, following the cuts in the last Parliament, the impact of the factors other than rate is even more significant in 2016 and should be a key focus for the Government.

In building this blueprint, we used a post-Brexit survey to test our proposals against the views of 176 senior tax and finance professionals. Sixty percent of respondents were from organisations with headquarters in the UK and 40% had an overseas headquarters. We also tested initial findings with a panel of FTSE 100 tax directors whose insight helped shape this report.

This is not just about keeping the UK open for business — with the opportunity to shape a new tax landscape, the UK should be seen as the country that is actively backing business to create the right economy for the country’s future.

How open is open?Before embarking on the creation of a tax blueprint, gaining a clear picture of the objectives will be essential.

Key to this will be recognising the extent to which the UK is already open for business on a sustained basis and also to understand the types of business that would make the most positive impact on the UK.

A crossroads for the UK?

Our UK Attractiveness Survey ‘Positive rebalancing’ shows that in 2015 the UK achieved its highest number of foreign direct investment (FDI) projects in any year since our FDI database was launched in 1997. That investment brought with it the creation of a record number of jobs and extended the UK’s long-standing leadership of FDI in Europe. The UK also made progress in several important areas:

Attracting key strategic investments such as headquarters, which increased by 172%, and R&D facilities, which grew 37% in 2015.

Manufacturing continues to do well with the UK attracting more manufacturing FDI projects than Germany for the second year running.

There was a good balance across sectors with software, financial services and business services posting healthy growth.

However, the report also shows that the future outlook for FDI is less certain this year than at any time in over 10 years:

When asked how the UK’s attractiveness for FDI will change in the next three years, only 36% of investors expect it will improve compared to 54% last year. This is the lowest UK score since 2004.

Even corporation tax, which has recently been one of the most attractive aspects of the UK as a location for establishing new activities, has dropped from 68% of respondents rating it as very attractive or fairly attractive in 2014 to 54% in 2015.

79% of investors cited access to the European Single Market (ESM) as a key feature of the UK’s attractiveness, up from 72% last year and 63% the year before.

1 Financial Times 3 July 2016.2 Ibid.

The tax landscape is changing — Building a business tax blueprint for the UK post-Brexit 32

Corporation tax is not the only rateRate reductions are always attractive, but is that sufficient in a UK context? And which rate is the most important in terms of supporting the need to keep the UK open for business?

When comparing different locations in terms of attractiveness from an investment perspective, the mainstream corporation tax rate is undoubtedly a very visible factor. With this in mind, before leaving office, George Osborne pledged to cut the rate to below 15%³ to encourage businesses to continue investing in the UK following the EU referendum vote. However, while nearly half of our respondents to our survey identified cutting the rate beyond the planned 17% as having a significant impact, this was not the most popular choice.

This perhaps reflects the fact that the corporation tax rate has already fallen significantly in the past 10 years. Indeed, from a starting point of 30% only 10 years ago, it has fallen to reach a planned 17% in 2020. It may be that a further cut would not provide the boost that was hoped and, before making any commitments, the Government should, therefore, give real consideration to the alternatives.

Our panel of tax directors felt strongly that indirect tax should be one of the first areas addressed by the Government post-Brexit. It is also worth noting that respondents to our wider survey rated deferring the BEPS Action 4 interest restrictions (44%) ahead of a corporation tax rate cut.

Support for employers?

The highest-rated change in terms of making the UK a more attractive place to invest was, in fact, reducing the employment tax burden. With the skilled labour force being one of the key factors behind the UK’s attractiveness,4 the burden on employers is a real issue. A small change to employers’ national insurance or to the impact of the apprenticeship levy could have a significant impact on UK businesses. Targeting any cut could also support wider objectives, through creating incentives for the employment of young people or the long-term unemployed.

3 Financial Times 3 July 2016.4 See EY’s UK Attractiveness Survey 2016 www.ey.com/UK/en/Issues/Business-environment/ey-attractiveness-survey-2016-uk.

Our panel of experts were surprised that respondents did not rate customs tariffs more highly but agreed that a cut in corporation tax beyond those already in plan would be unlikely to have a significant impact.

All of this shows that unless the Government takes positive action, the decision by the UK to leave the EU could potentially impact the UK’s future FDI performance. A clear strategy to reinvigorate our ‘open for business’ message is, therefore, needed as soon as possible. Getting the tax system right will be a key part of that process.

Bringing the right investment

Few countries are in the position to turn down investment and the UK is no different. However, to understand the tax changes that will have the most impact, it is important that the Government is clear as to the businesses that will make the most difference to UK growth. Our UK Attractiveness Survey showed that the sectors that investors believe will act as top growth engines in years to come are ‘banking, insurance,

wealth and asset management’ and ‘information and communication technologies’. The UK currently leads the rest of Europe in these two sectors and is also out in front in ‘business services’, another of the top five sectors identified.

Another sector that should be a key focus for the Government is manufacturing, which is not just a source of factory-based investment and jobs, it also acts as a multiplier; stimulating other investment. UK regions have shown they have the capability to attract an increasing amount of manufacturing investment, but there is still more market share to win.

The challenge for the Government will be in maintaining the UK’s competitive position in these sectors and tailoring the tax blueprint as necessary.

Defining clear objectives

The question of what ‘open for business’ means is one that goes beyond the remit of this report, but it is an issue that the Government should clarify over the months and years to come. It could provide an opportunity to rebalance the economy and facilitate inclusive growth, but to achieve this, the UK needs the right mix of skills and talent, both nationally and locally, to meet changing labour and digital demands. Cities beyond London need to have the necessary power and opportunities to further their growth and development. Providing clarity about objectives like these is essentially in framing any blueprint for the future.


It’s all about the baseFor many businesses, tackling the tax base represents a more attractive long-term strategy than a cut in the mainstream corporation tax rate. In particular, there is a sense that, over time, reliefs for genuine business expenses have eroded.

To what extent could changes to the tax base differentiate the UK as backing business?

Is it possible to distinguish between a tax system that reflects the complexity in the market and one that is just intrinsically complex?

Much of the complexity around the UK corporate tax system relates to business expenses that cannot be claimed as a deduction in calculating the sum on which mainstream corporation tax is paid. For example, while the cost of real estate in the UK has outstripped many of our major competitors, businesses cannot offset the cost of premises. Industrial buildings allowance was abolished in 2007 on the grounds of ‘simplification’ but, since these are genuine business expenses, there is a strong case for reintroducing some form of an allowance for the depreciation of business premises.

Similarly, a specific deduction for amortisation of all intangible assets, including goodwill would make a significant difference for many organisations and could go some way in terms of making the UK an attractive place to do business.

The challenge for the Government is that while a low corporation tax rate is always welcome, if that rate is applied to a sum far higher than the profits made, an initially attractive rate can seem like little more than ‘smoke and mirrors’.

Getting the timing right

In addition to improving the base, the Government should look again at the timing of tax relief. The recent deferral of relief under capital allowances and the acceleration of when companies pay their taxes, bring forward tax deadlines and effectively mean that companies need to fund the tax earlier. Given that companies generally borrow at higher interest rates than the Government, this is economically inefficient as a whole.

The forthcoming restriction on the use of brought forward losses will have the same effect, potentially hitting infrastructure projects hardest as they often require considerable investment (and hence loss) before they become profitable. This again should be considered with the wider review.

Take the indirect route?

With the UK’s indirect tax regime so closely tied to the EU, Brexit will inevitably cause significant changes, and this represents a clear opportunity for the Government to explore the alternatives. Again, while a focus on the overall rate of VAT was deemed a significant issue for our respondents, over half prioritised measures to support UK businesses suffering in relation to speed of VAT recovery. This reflects the importance of understanding the context that taxation sits within. For example, cash flow and administrative burdens have a significant impact on business and a low tax rate is not always enough compensation.

More broadly, the expected changes to indirect tax arising from our withdrawal from the EU may require organisations in the UK to restructure their business models and supply chains so clarity around future state is needed as soon as possible. Businesses are already concerned about the extent of the compliance burden that might arise and the extent to which they currently rely on EU law and rulings. They also need to understand

the degree to which there will be changes to other indirect taxes, like air passenger duty, insurance premium tax and environmental taxes.

Setting the right tariffs?

Customs tariffs drew particular attention from both our panel and our wider survey. They are another area of the tax regime that is intrinsic to the EU under the current system and represent rates other than the mainstream corporation tax rate that are significant for businesses. More than a third of respondents thought that obtaining zero tariffs on imports to the UK should be one of the guiding principles for the Government, while 44% said the same with respect to zero tariffs on exports to the rest of the EU. While these are significant numbers, our panel was surprised that they were not even higher. Changes to tariffs will be a key consequence of Brexit but they have received little focus in recent

years as currently the system works so well. As such, it may be that the importance of issues surrounding duties going forward are only just starting to emerge.

Resolve an inequity?

Looking at other tax rates, respondents regarded lowering the higher rate of income tax almost as highly as a cut in the mainstream corporation tax rate, which again demonstrates that the corporation tax rate is not the only option. Indeed, a sentiment running through the comments in our survey was a call for the removal of the perceived inequity caused by the reduction in personal allowance for those earning over £100k. Some respondents argued that there is little incentive for those earning just below that threshold to progress beyond it, which was seen to have a potential knock-on effect on productivity.

What would have the most significant impact in terms of making the UK a more attractive place for your business to invest?

64% Reducing the employment tax burden

43% Cutting the mainstream corporation tax rate

41% Lowering the higher rate of income tax

39% Cutting the rate of VAT

The blueprint from business:It is not just about corporation tax — other taxes, like the burden of employers’ NIC and apprenticeship levy — arguably have a bigger impact on business. Taxes should be cut for a purpose such as to reduce the costs of wages or capital investment. The Government should:

View the mainstream corporation tax rate as just one element of what keeps the UK an attractive place to invest

Review the employment tax burden

Recognise that a primary concern for business is indirect tax and, in particular, customs tariffs.

What indirect tax measure would have the most significant impact in terms of keeping the UK open for business?

50%

Measures to support UK businesses suffering in relation to speed of VAT recovery

43% A cut in the rate of VAT to 17.5%

41%Introduce reduced customs duties on the import of some preferential goods

Our panel agreed that, if the Government is serious that the UK is 'open for business', tax base must be key.


Looking at interest?

We presented respondents with a number of options that the Government could consider as part of a review of the tax base. Almost three-quarters indicated that a deduction for genuine business interest expenses would be of real importance in making the UK an attractive place to do business. This is likely to reflect the fact that interest is part of the overall cost of doing business, as well as associated concerns around the proposed implementation of Action 4 of the G20/OECD’s Action Plan on base erosion and profit shifting (BEPS). The Government should consider whether there is a way to implement the Action 4 interest deduction proposals to address concerns around base erosion and profit shifting but retains relief for genuine interest expenses.

The external view

A key consideration for the Government should be the differentiated responses between respondents with UK headquarters and those with headquarters overseas. Across the board, while the majority of respondents rated changes to the tax base positively, overseas respondents rated such changes more highly than their UK equivalents. For example, the significantly higher rate of response in relation to interest deductions reflects the extent to which this has long contributed to the attractiveness of the UK as a destination. If the Government is serious in its commitment to keeping the UK open for business, the importance of seeking views from both inside and outside the UK should not be underestimated.

Simplifying the right things?

Changes to the tax base should not stop at rates and allowances. In their comments, respondents also called for greater simplicity in the qualifying criteria for reliefs. This perhaps reflects a fundamental issue with the Government’s recent approach that has been to make wholesale changes in the pursuit of simplification. As already illustrated in terms of industrial buildings allowance, these changes have not always had the intended effect. The complexity of the UK’s businesses and market coupled with the pace of technological advances means that is unlikely to change in the near future.

We would argue that, by its very nature, a complex market requires a complex tax system to facilitate compliance and fairness. In pursuing simplicity of the tax system as a whole, the Government has, therefore, set itself a potentially impossible goal and, in doing so, has overlooked what businesses really want — simplicity of operation. Key to this is certainty around qualification criteria for reliefs and incentives — a sentiment reflected throughout the comments in response to our survey. The Government should aim to have a tax system that is no more complex than necessary to deliver on the wider aims for the country.

Which of the following would be most useful for your business in terms of the tax base?

71% A deduction for genuine business interest expenses

50% A deduction for tax depreciation on all capital expenditure (including industrial buildings, offices, etc.)

41% Providing more generous rates for R&D tax credit

37% A specific deduction for amortisation of all intangible assets, including goodwill

68%

A deduction for all genuine interest

expenses

A deduction for tax depreciation on all capital expenditure (including industrial

buildings, offices, etc.)

Providing more generous rates for

R&D tax credit

A specific deduction for amortisation of

all intangible assets, including goodwill

Extending to the patent box to a

broader range of intellectual property

Which of the following would be most useful for your business? Responses for high levels of importance

76%

48%53%

39% 43%

UK HQ Non-UK HQ

29% 36%36% 39%

The blueprint from business:

Unless there is an overriding policy reason why not, all business expenses should be deductible. It would be fairer to apply the tax rate to economic profits made. As a starting point, the Government should:

Focus on simplicity of operation rather than simplicity for the system as a whole

►Review the tax base and recognise the positive impact to be gained from a return to the principle of tax relief for genuine business expenses

If a broad approach is not feasible, provide relief for genuine business interest and capital expenditure

Use the tax base to encourage and incentivise more innovation, capital investment, product development and productivity

Our panel of experts were unanimous in agreeing — Keep it simple. Keep it certain.


Mark Persoff Partner, EY EMEIA Financial Services - Tax 020 7951 9400 [email protected]

Jeff Soar Managing Partner, EY UK Financial Services – Tax 020 7951 6421 [email protected]

Financial services viewpointThe impact of Brexit may be particularly acute for the financial sector — especially with the potential loss of passporting/single market access. Many financial services firms are therefore considering how Brexit might impact their businesses and people.

While a tax blueprint is unlikely to compensate for the potential loss of single market access, it could provide the UK Government with the opportunity to formulate a set of tax policies that help the UK remain competitive for financial services firms.

The financial services sector has already undergone a period of considerable turbulence since the crisis of 2008/09. The UK's response to that focused on regulatory change, but also incorporated a significant increase in tax burden. In particular, banks have been subject to a payroll tax, a ‘permanent’ balance sheet levy (with successive and significant rate increases), an 8% surcharge on corporation tax and considerable restrictions on their ability to utilise losses, as well as the introduction of the Code of Practice on Taxation for Banks. The pace and intensity of tax

change, often announced without prior consultation, has unsettled the sector. Some business has recently moved from the UK to other jurisdictions, and tax is understood to have been a factor in that.

One of the first differences in the survey response from the financial services sector derives from the fact that such businesses cannot recover any VAT they incur. This, combined with the surcharge, explains why the financial services businesses are far more focused on the VAT rate than the corporate tax rate.

With all this in mind, the financial services sector has two key priorities in terms of a tax blueprint for the UK:

1. The increases in the tax burden for the sector were imposed in a different environment, where the UK was the natural location from where to access the EU. In a post-Brexit vote environment, the additional uncertainty should encourage the Government to revisit the merits of what have been perceived to be punitive tax policies applied since the crisis. The abolition of the bank levy (or at least accelerating reductions of rate and the scope changes that will take effect in 2021) and the corporation tax surcharge would be positive steps, as would providing more flexibility around utilisation of losses.

2. Like other businesses, the financial services sector needs to be able to plan for the medium to long term knowing that the UK tax system will provide a sustainable and certain platform. Of particular concern is the UK's determination to push forward with anti-hybrid legislation (e.g., branch mismatch rules) and interest limitation rules despite considerable uncertainty as to how these will apply both generally and to financial institutions in particular. The fact that the UK is proposing to implement such rules before other countries adds further uncertainty.

Finally, the press has recently suggested that David Cameron considered in 2010 a plan for an ‘aggregated City tax take’ — effectively a cap on tax for the financial sector. This was never introduced. Given the uncertainty produced by the referendum vote, it may be useful for Government to resurrect this idea.

Which of the following would have the most impact in terms of making the UK a more attractive place for your business to invest?

Reducing the mainstream corporation tax rate beyond the 17% already in plan

Reducing the rate of VAT

43% All businesses

26% Financial services

39% All businesses

63% Financial services

1110 The tax landscape is changing — Building a business tax blueprint for the UK post-Brexit

Is the current system of tax administration enabling businesses to be agile?

Could there be an opportunity to reshape operations in the post Brexit tax landscape?

The administration of our tax regime is a key factor in the attractiveness of the UK as a place to live and do business. At the most fundamental level, the tax system needs to be robust and, if the administration of it does not work effectively, there is a risk to both HMRC and UK businesses. As well as money and resource, that risk includes more intangible issues such as delays in commercial decision-making and the impact on long-term planning. In particular, the way that large businesses and HMRC interact plays a significant part in the attractiveness of the UK as a place to do business.

Earlier this year, our report ‘Building the balance: cooperative compliance in practice’ highlighted a great deal of support amongst tax directors for HMRC’s current Customer Relationship Manager (CRM) model. However, a number of issues were raised that potentially detract from the attractiveness of the UK. These issues were reflected again in responses to our survey.

Getting answers

With the uncertainties surrounding Brexit, it is more important than ever for businesses to receive certainty from HMRC. In particular, businesses need to know that they will get responsive and constructive clearance rulings from HMRC, as well as effective and timely dealing with enquiries and audits.

A factor that the Government may wish to consider is the extent to which respondents with headquarters overseas value these factors. In fact, given that our 2016 UK attractiveness survey shows ‘stability and transparency of political, legal and regulatory environment’ as a key factor in attracting investment to the UK, it is an issue that should not be overlooked.

Understanding business?

Throughout the comments made in response to our survey, respondents called for CRMs to be able to make quick decisions without deferring to others. Respondents also talked about the need for CRMs (and HMRC more widely) to gain a more comprehensive understanding of commercial issues. While CRMs do receive training on business issues, digital developments mean the market, and with it the challenges faced by business, is moving at an unprecedented pace. At the very least CRMs should have training on a regular and ongoing basis.


Responsive and constructive clearance rulings

More joined up policymaking between business and Government

Effective and timely dealing with enquiries/ audits

75%

72%

67%

74%


76%74%

69%67% 68%

UK HQ Non-UK HQ

Responsive and constructive

clearance rulings

More joined up policymaking

between business and Government

Effective and timely dealing with enquiries/

audits

The blueprint from business:

With the impact of Brexit still unclear, businesses need to be flexible in order to respond to challenges as they arise. As such they need enhanced and ongoing investment in HMRC so that it can provide:

►Responsive and constructive clearance rulings and technical advice

Effective and timely dealing with enquiries

Transparency of processes

Other certainties required by business include:

Reasonable interpretation of the law

Proper risk based intervention/nonintervention

The ability to escalate and red flag

Our panel of experts agreed, the HMRC’s CRM model is great when it works and when the CRMs have the authority to make decisions. However, more investment is needed to confirm that it works on a consistent and ongoing basis.

Two factors highlighted as key requirements by our panel in terms of UK attractiveness are the ability to get certainty of treatment and a properly resourced clearance process.

Investing in tax administrationTo compete in the global and local marketplace, businesses need to be able to respond quickly and, in doing so, they need certainty as to the tax implications of a proposed course of action. To achieve this certainty, the framework and resources that underpin our tax system require investment.


Setting strong foundationsThe way that tax policy is made and the principles that underpin it should provide a solid basis on which the blueprint can be framed.

In developing the tax blueprint, the Government should be considering a number of factors from a policy perspective. These go beyond initial ‘headlines’ to convince businesses that the UK is still open for business post-Brexit — it is about using long-term principles to provide the UK with a strong foundation on which to build the new landscape.

With those long-term principles in mind, it will come as no surprise that respondents to our survey identified maintaining the lowest rate of mainstream corporation tax in the G20 as being one of the most important principle that should underpin the Government’s post-Brexit tax system, with over half rating it first, second or third. In a similar vein, businesses rated highly zero tariffs on both imports from and exports to the EU and this is another area that will be monitored closely as the Brexit process develops.

Time to renegotiate?

However, perhaps more strikingly, a higher number suggest that the Government should provide a commitment to maintaining and reinforcing the UK’s double tax treaty network. This reflects concern that seven of the UK’s treaties do not deliver the same benefits of the EU Parent-Subsidiary Directive on withholding taxes and highlights the importance of renegotiating them at the earliest opportunity. This is a particular concern for businesses that need to bring profits back to the UK.

Slowing things down?

There was a real appetite amongst respondents for slowing the introduction of the UK’s response to BEPS so that it is aligned to the majority of countries — both in response to specific questions and in the comments to our questions. Almost half of respondents also called for a deferral of the BEPS Action 4 interest restrictions.

37%


43%

Slowing the introduction of the UK’s response to BEPS to align to the majority

of countries

UK HQ Non-UK HQ


55%A commitment to maintaining and reinforcing the UK’s double tax treaty network

52% Maintaining a mainstream corporation tax rate target of being the lowest of the G20

44%Implementing zero tariffs on exports to the rest of the EU

40%Slowing the introduction of the UK’s response to BEPS to align to the majority of countries?

37%Obtaining zero tariffs on exports from the UK

The blueprint from business:With so much uncertainty surrounding Brexit, the Government needs to keep the UK actively open for business from a tax perspective. To do so it needs to:

Recognise the benefit of simplicity when choosing options for implementation

Stability is key — set the blueprint and then keep changes to a minimum

Maintain a competitive mainstream corporation tax rate in relation to the G20

Get the essentials right — such as double tax treaties and tariffs

Rethink the timing on BEPS to reduce uncertainty during the post-Brexit period

Respondents were not calling for an end to BEPS but instead there was a sense that, if the UK is to remain attractive for business, it should step back from taking the risk inherent in leading the way and ‘join the pack’ instead, with the ability to learn from others.

This sentiment was particularly strong amongst those with non-UK headquarters.

Getting the basics right?

More than anything else, across the entirety of our survey, businesses called for certainty and simplicity. Initial sentiment around Brexit appears to be that, although it represents a potential disruption in the market, day-to-day business will continue as usual. However, in order to weather the potential impact of Brexit, businesses need to reduce the uncertainty elsewhere. As such, they need clear legislation and guidance that is interpreted the same way by business and HMRC. Ongoing changes to the system were seen as detrimental to progress.

Our panel agreed that the impact on customs and excise duties will become a key consequence of Brexit. They raised a concern that the importance of such duties have been underestimated because they currently work so well.


Making it happenThe UK has a strong history of being the doorway to Europe, even before our membership of the EU, and it remains a great location to invest in and from.

The Government has an opportunity to truly differentiate the UK from a tax perspective but, if we are to move beyond being ‘open’ for business into something more forward looking, competitive tax rates are only one of the requirements.

A vision is needed to provide a clear and stable sense of direction so that businesses can predict the tax impact of their activities at a time when so many other things are uncertain. While low taxes are universally popular, the same outcome can be achieved by changing the base that represents a longer-term and more certain proposition for business. Indeed, to build a stronger future outside Europe will require capital investment for which tax relief is needed rather than rate cuts.

To take the blueprint forward, the Government should engage with business at the earliest opportunity

to understand how the building blocks fit together and where the most value will lie. In doing so, it is important to recognise that Brexit represents one of a number of disruptions in the market. Others include the rapid change engendered by the digital agenda. All of this means that the market is moving at an incredible pace and businesses need to be agile in response. The tax system should support that agility.

In a world of change, there is an enormous opportunity to evolve but one thing is clear — standing still is not an option.

Corporation tax is not the only rate

View the mainstream corporation tax rate as just one element of what keeps the UK an attractive place to invest

Review the employment tax burden

Recognise that a primary concern for business is indirect tax and, in particular, customs tariffs

It’s all about the base

Review the tax base and consider a return to the principle of tax relief for genuine business expenses

If a broad approach is not feasible, provide relief for genuine business interest and capital expenditure

Use the tax base to encourage and incentivise more innovation, capital investment, product development and productivity

Focus on simplicity of operation rather than simplicity of the system as a whole

Investing in tax administration

Responsive and constructive clearance rulings and technical advice

Effective and timely dealing with enquiries

Transparency of processes

Reasonable interpretation of the law

Proper risk based intervention/non-intervention

Ability to escalate and red flag

Setting strong foundations

Recognise the benefit of simplicity when choosing options for implementation

Stability is key — set the blueprint and then keep changes to a minimum

Maintain a competitive mainstream corporation tax rate in relation to the G20

Get the essentials right — such as double tax treaties and tariffs

Rethink the timing on BEPS to reduce uncertainty during the post-Brexit period

The blueprintWith an unprecedented opportunity to reassess the tax regime in the context of keeping the UK open for business, we have set out a blueprint of proposals that the Government should consider (summarised below). If the UK is to move beyond being merely ‘open’, we believe the Government should focus on four key areas:

DemographicsOur survey was carried out in July and August 2016, had 176 respondents. For many questions, a rating of 1 to 5 was used. Ratings of 4 and 5 were taken as positive:

60%of respondents were from an organisation with a UK headquarters, 40% had a non-UK headquarters. 25% of respondents had a headquarters in the US.

55%had annual turnover of more than £1bn and 85% had annual turnover of more than £100mn.

65%were either tax directors or CFOs. The remainder were finance directors, financial controllers, tax managers or members of the C-Suite

Our panel of experts all agreed — take the time to develop a policy for the long term and then ensure that any necessary future changes are consistent.

1. Return to real relief for genuine business expenses

2. Provide certainty by setting out, communicating and actually implementing tax law in line with a clear plan

3. Think beyond the headline grabbing changes to the mainstream corporation tax rate and consider the incentives that will make a real difference to business

4. Be transparent in engagement with business — the process should be visible, readily understood and evidenced

The proposals


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