Brexit will redraw investment competitiveness of the UK

01 May 2017 Consultancy.uk

The United Kingdom remains an attractive place to do business thanks to its competitive infrastructure and tax landscape; however the country faces an uncertain future thanks to last year’s referendum decision to exit the European Union. Brexit and related government policy in the decision’s slipstream are set to redraw UK’s investment competitiveness, a new report claims.

The UK has lost ground in global professional network KPMG’s annual rankings of both tax competitiveness and appeal as a destination for Foreign Direct Investment (FDI), according to a survey of 100 of the largest UK listed companies and foreign owned subsidiaries. The 34 page analysis also features testimony gathered from some 60 companies from across other G7 nations, including EU grandees France and Germany, countries particularly concerned with the unknown that will surface on the back of Brexit. 

In some respects, the report displays business as usual, highlighting that companies across the board continue to make decisions on a variety of different criteria – and consistent with previous years’ data, this has not experienced a seismic shift. However, while KPMG finds this diversity to be encouraging enough to predict there will be no wholesale exodus of businesses resulting from Brexit, there are many indicators that foreshadow a net outflow of activity.

When asked for their top criteria for the location or retention of business in the UK, aside from tax regimes, executives interviewed stated that the availability and cost of skilled labour, the market size, macroeconomic and political stability, and access to infrastructure are the five most important factors in their decision.

Factors that influence location of business functions

Access to skilled labour

Of particular importance in the data is that access to skilled labour clearly remains a key concern for many companies, to the extent it is one of their top three recommendations to the Government to boost Foreign Direct Investment (FDI) inflows. This is in no small way due to the particular matter’s close relation to Brexit negotiations. At present the UK’s membership of the EU allows for freedom of movement and a right to work for citizens between other member states, giving companies inexpensive access to skilled migrant workers across borders, to supplement Britain’s native workforce. 

Building on the correlation between freedom of movement and access to skilled labour, KPMG then asked their sample for a preferred Brexit scenario. By far the most popular answer in both UK (46%) and non-UK (41%) respondents was for “the UK joining the EEA, retaining full access to the Single Market and accepting the free movement of people.” Furthermore, while only 9% UK companies stated access to the single market was a priority for them, a quarter of non-UK business stated this a key concern, placing it amongst their top four priorities. Non-UK companies also highlighted concerns regarding potential increases in tariffs – with 22% of respondents naming that as one of their top three criteria for remaining in the UK. One anonymous international tax manager quoted in the document predicted, “The biggest challenge will be Brexit coming and then the custom taxes increase. That will then result in jobs and institutional bodies returning to Europe.”

Difference between UK and Non-UK company priorities

While for companies looking to trade within the UK, a divorce from the European Union might not have an immediate impact therefore, KPMG’s figures suggest non-UK companies may well begin to find other locations more appealing in the long term, and even relocate activities and jobs to mainland Europe. The risk has materialised in recent weeks, with several banks unveiling plans to transfer some of their City staff to mainland Europe, while Swiss transnational food giant Nestle announced 300 jobs will be relocated from York to Poland, in what some believe is an ominous sign of more of such similar things to come. 

Further to this, while the UK retained its status as the second most attractive nation for tax incentives, following Ireland, 35% of companies interviewed stated this had “No Influence” on their decision to locate business activities there. This constitutes the joint-lowest “High Influence” result in eight years, and further demonstrates the importance of other factors at play in the UK’s political arenas currently. 

Of the top 5 strengths of the UK against international competitors in 2015, 53% of respondents marked political stability as one of the three key factors in its favourability. As the report notes, national elections in both Germany and France, the cornerstone states of the EU, mean that meaningful negotiations will be delayed until the latter half of 2017. With political stability marked out as key, the prolonged negotiations of Brexit which is unlikely to come to fruition before 2019, could be costly. This is before even considering potentially volatile scenarios emerging out of Scotland and Northern Ireland as a result – both regions having voted to remain within the EU, to the extent mainstream politicians of both have spoken openly about independence referendums from the United Kingdom.

Top five strengths of the UK versus international competitors

Brexit is impacting UK’s attractiveness

KPMG’s report was released just weeks before Prime Minister Theresa May’s shock announcement of an unexpected general election, to be held on June 8th, casting yet more doubt on exactly what Brexit will look like. While major political party will craft their manifesto around the implementation of the exit, both major parties have pledged to curb freedom of movement – meaning yet more uncertainty around the cost and availability of skilled labour from outside the UK. The incumbent Conservative government have made reducing immigration, including EU migration, a key commitment, while the opposition of the Labour Party have also promised an end to free movement in its current capacity – both of which may spell trouble according to KPMG’s figures, and the anxiety amongst top companies that they reflect.

Countries with the most competitive tax regimes 2012-2016 (UK companies)Summarising the report on its release, Tim Sarson, a partner at KPMG in the UK, noted: “Historically, the UK’s attractiveness has been driven by its status as a trading nation, stable politics and tax system – but Brexit is challenging this. It’s clear, the potential disruption of leaving the EU and ambiguity over the UK’s future economic prospects now weigh heavily on executives’ minds. Taken together with companies’ views on migration of business functions this points to a possible net outflow of activity from the UK in 2017 and beyond.” 

Robin Walduck, a partner and KPMG’s Head of International Tax, adds, “The challenge for the UK Government during the next two years will be to avoid the trap of inertia during exit negotiations and to recognise there are still levers that can be pulled to help ensure the UK retains its appeal.”

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