Tax rate of FTSE-100 companies drops nearly a third in last two years

31 October 2011

Publications that covered this article include Accountancy Age, The Daily Express, The Daily Mail and Reuters, 31 October 2011.

  • Large businesses still concerned about UK tax regime

The tax rate paid by FTSE-100 companies has dropped almost a third over the last two years, according to our new research.

The effective tax rate of FTSE-100 companies (i.e. tax as a percentage of profits) is now just 26% compared to 35.8% two years ago. This tax rate has fallen even as profits have risen.

While this is partly a result of a fall in the headline corporate tax rate over the last two years[1], the steep decrease has also been partly caused by some British companies moving their headquarters overseas.

FTSE 100 companies are also generating a higher percentage of their revenues overseas. This means that they are able to take advantage of lower prevailing tax rates in those overseas jurisdiction

Average effective tax rate of FTSE-100 companies

(Calculations based on latest annual reports published as at August 31st)

Roy Maugham, Tax Partner at our London office comments: “Companies have a duty to their shareholders to keep the tax they pay under control.”

“With more of their operations now based overseas it is only sensible for them to ensure that their business is structured properly so that they are paying tax at the best rate.”

“That doesn’t mean they are doing anything that is illegal or pushing the boundaries of acceptable tax planning. They may simply be reducing their activities in high tax overseas jurisdictions or controlling their non-allowable expenditure more effectively.”

Roy explains that the last few years has also seen a growing number of British companies move to jurisdictions with lower tax rates in order to reduce their tax burden. Shire, WPP and United Business Media all chose Dublin as the location for that move.

There are mixed signals as to whether this trend will continue with WPP confirming it would return to the UK.

Roy adds: “HMRC has made strenuous efforts to close tax loopholes and increase the tax take in recent years, but by squeezing companies too hard, it risks driving them offshore.”

According to recent research (June 11) carried out for HM Revenue & Customs (HMRC), one in four (26%) large businesses is considering relocating part or all of its business abroad. Of those, 58% say that tax is the main factor pushing them to relocate.

Roy says that reducing tax bills is not the only reason why companies move overseas.

Roy explains: “Tax uncertainty in the UK, particularly successive Government’s relentless tinkering with the tax system - as well as HMRC’s crusade to close tax avoidance loopholes in the past few years - have undoubtedly had an impact on the attractiveness of the UK as a place to conduct business.”

However, concerns over the relocation of UK businesses have spurred the Government to introduce new measures to make the UK tax environment more competitive.

Roy comments: “The tax burden is a vital consideration for highly mobile multinational companies when deciding where to be based. Whilst the Government has made efforts to make the UK tax regime more attractive, will it be enough to stymie the tide of British companies still thinking about the exit?” 

 [1] The corporate tax rate is 26% this year (1/4/11 to 31/3/12), down from 28% in the two previous years.

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