Britain should beware a global business exodus

Amid rising corporation tax rates, there is no cause for complacency about the country’s attractiveness

Is Britain any longer a place where you would want to do business? The fear after this week’s Budget – which looks increasingly like one of those Budgets that seemed good on the day, but progressively unravels the more the rats get to gnaw at it – is that the UK has just become that little bit less so.

At the start of the Brexit negotiations, Philip Hammond, then chancellor, told a German newspaper that if the European Union refused to grant Britain sufficient access to its markets, the UK would have to change its economic model in order to remain competitive globally – becoming a kind of low-tax, low-regulation Singapore-on-thames. (And you wouldn’t like that on your doorstep, would you, was his implied threat.)

Well, here we are four years later, having now Brexited, and thanks to Covid, we seem to be heading off in exactly the opposite direction.

The idea that a mature, highwelfare, advanced economy such as the UK, could be remodelled into a Singapore may always have been somewhat fanciful. But the idea that we would, subsequent to Brexit, come to look ever more like our European neighbours – not less so – would not have been predicted. Far from diverging, as might have been expected, we appear instead to be converging – at least in terms of the tax burden.

Whether there was ever any choice in the matter is admittedly questionable. No Tory chancellor wants to raise taxes, but Rishi Sunak has had his hand forced by the demands of the pandemic.

One way or another, the ruinous cost to the public purse of compensating businesses and households for the partial closure of the economy has to be paid for. For Downing Street, hitting big business for the lion’s share of it via a

25 per cent plus hike in the rate of corporation tax appeared the least worst option, and indeed one that might even prove politically popular.

Regrettably, people have not yet learned to love wealth creation. Broadly speaking, big business has been the least affected by the pandemic, so why shouldn’t it be made to pay? In any case, many of the business leaders I speak to seem resigned to it. Far worse would have been the threatened alignment of capital gains tax with income tax rates. If nothing else, Sunak has proved himself adept at the art of expectation management in priming everyone for a far bigger tax raid on wealth than we actually got. There was widespread relief that it wasn’t worse.

He’s also cleverly mitigated the pain by exempting the vast majority of small and medium-sized enterprises from the tax rise, and promising banks that he plans to partially compensate them by reducing, or even abolishing, the banking levy charged on top of corporation tax.

All the same, £17billion a year is a major tax grab, which is plainly going to make the UK less of a magnet for business than it was. All the other things that make Britain attractive – rule of law, advantages of language, time zone, cultural diversity, and size of market – remain the same. An American banking chief once told me that key to his choice of the UK was that it was one of the few places on the planet where you can even sue the government and expect to get a fair hearing. Those sort of attributes are not yet obviously under threat.

It is also true that the rate of corporation tax, provided it doesn’t rise off the scale, comes quite a long way down the list of concerns that business has about the UK economy. Business leaders would be much more worried about lack of competitiveness on rates of income tax. Deficiencies in skills and infrastructure, a still shamefully dysfunctional education system, and growing frictions in trade with Europe are all cited as far bigger issues. Get these things right, and productivity, wages and tax revenues would all surge. There would be no need to fiddle around with tax rates.

Laffer curve thinking – the idea that by cutting taxes you automatically get higher economic activity and therefore paradoxically a bigger tax take – isn’t entirely dead. Yet even the CBI, the big business lobby group, came to accept that progressive cuts in the rate of corporation tax would eventually hit the law of diminishing returns, doing little or nothing to further stimulate business investment and growth. Sunak’s bet is that partially reversing the downward trend of the last decade will similarly have few behavioural consequences.

It’s quite a gamble, for these things are as much about messaging and perception as tax yield theory. Capital and business have never been more mobile than they are today. As we have learned during the pandemic, modern communications technology enables wealth creators to work from wherever best suits them. Tax is likely to be a significant factor in that calculation.

International investors will read the headlines – the biggest tax-raising Budget since the early Nineties, the highest tax burden since the Sixties – and they will wonder whether the UK is really where they want to be. That tipping point may not be far off.