Using tax to lure business away from London

"London rivals 'cherry picking' business"
An article published by Vanessa Houlder in Financial Times on September 10 2008

London's rivals are using tax to lure business away from the City, a leading City policymaker has warned.

Stuart Fraser, chairman of policy at the City of London Corporation, said the government must fight back by tackling the uncertainty and complexity of Britain's tax regime.

He warned that rival jurisdictions were "cherry picking" London's most lucrative activities. He cited Switzerland's attempt to attract wealth managers and hedge funds and a move by Paris to attract private equity firms. "They are very keen on taking us on. What they want is our business". He called for greater clarity and predictability in the UK tax system. "People need certainty. They want to be confident that if they stay here the system will not change."

His comments follow recent decisions by Krom River, a London hedge fund to move to Zug in Switzerland and five large companies to shift their holding companies to Ireland or Luxembourg. Mr Fraser said the corporate moves were symptomatic of the dissatisfaction with the tax system, although the establishment of "brass plate" operations abroad did not pose an immediate threat to jobs or the City.

The UK still attracts the largest number of headquarter functions of any European country, but its share fell from over 40 per cent to 30 per cent last year, the lowest figure yet recorded by Oxford Intelligence, which compiles data for Ernst & Young's European Investment Monitor. Peter Lemagnen, director, said the relocation trend primarily affected larger companies where there was scope for significant tax savings.

Some advisers warned that a continued exodus of holding companies from Britain would damage the City.

Peter Wyman, global head of policy and regulation at PWC, the professional services firm, said that shareholder pressure for tax savings meant that "a slow trickle is likely to become a faster trickle if not a flood". He said the likely impact of more relocations was "a mixed picture, conceivably over time a big loss". "Undoubtedly, if you move your headquarters somewhere other than London you are likely to get an increased amount of advice from where you are now based."

Chris Morgan, an international tax partner at KPMG, the professional services firm, said it was inevitable that over time financial services would move to the country where the company was managed and controlled. "I think they should be incredibly worried about it."

James Bullock, a partner at McGrigors, the law firm, said that if the trend for headquarter relocations continued, the City was likely to lose out. "It is all about key relationships. If board and strategic directors are in Switzerland, the partners [of accountancy and law firms] will want to be there too."

The Irish government has already told companies considering relocations it wants to see "real substance" in its investment, rather than merely "brass plate" operations.