Is Wolseley's Swiss switch the start of an exodus?
The UK taxes that prompted the plumbing group's move to Switzerland could force others to follow suit
Tuesday 28 September 2010
Leaf through The Economist magazine and it is difficult not to notice the adverts placed by a number of emerging market countries, encouraging businesses to move to such places as Macedonia. The young population is highly educated, they promise, and they don't demand high wages. And, crucially, the rate of corporation tax is much lower than in Western Europe. No doubt all the claims are true, but to date few, if any, major companies in the UK have taken the Skopje administration up on its offer.
Yet Wolseley, the world's biggest plumbing and heating products supplier which can trace its British roots back to 1889, said yesterday that it was moving its tax domicile to Switzerland. The firm, which trades in 25 countries, said a new holding company will be UK listed, incorporated in Jersey and have Swiss tax residence. All because the group, like a number of others in recent years, thinks it pays too much UK tax.
"Our underlying tax rate has now moved up to 34 per cent. By redomiciling to Switzerland that tax rate will come down to about 28 per cent," the chief executive Ian Meakins said. His finance director, John Martin, said if Wolseley was already domiciled in Switzerland, it would have saved £23m in the year to 31 July.
Mr Martin blamed Britain's controlled foreign company (CFC) tax regime, which applies UK tax on overseas earnings, for the decision to switch. Under CFC rules, UK-domiciled companies are subject to a charge for tax on undistributed income of low tax controlled foreign companies of which they are shareholders. It is especially problematic for groups such as Wolseley that rely on large overseas earnings. "It is 100 per cent the CFC regime in the UK. It's not very helpful to Wolseley. The principle reason for that is 81 per cent of our revenue is from outside the UK," he said.
Mr Meakins said the decision had been discussed with the Government, but that despite consultations on CFCs, "it is hard to see how the Government can solve the problem." He added: "We don't want to go to Switzerland, but the tax number is enormous. We are charged with creating shareholder value, and they were saying to us, what are you going to do about the rising tax charge? I'm quite sure that our move today will prove a catalyst for more conversations at other companies."
With investors pushing for ever greater returns, moves such as the one proposed by Wolseley may seem obvious, but a number of tax specialists point out that a decision to change is not always as clear-cut. "Tax regimes change all the time, and what may look attractive today may look less enticing in two or three years," said John Cullinane, tax partner at Deloitte. "The CFC rules have been around since the early 1980s, but add on to that the 50 per cent income tax rate and the limited tax relief on pension contributions and the whole situation can become a tipping point for some companies."
Wolseley is the latest in a growing list of companies to have left the UK for tax purposes after similar moves from the likes of WPP, Shire and Informa in the last couple of years. But it is the first since the general election in May. In July, the Chancellor, George Osborne, repeated a rallying call from the Coalition, saying that Britain is "open for business", adding that he would reform "the complex controlled foreign company rules that have driven business overseas".
It moved too slowly for Wolseley. In response to the group's move, a Treasury spokesman said: "The Government's long-term aim is to create the most competitive corporate tax system in G20 and in the Budget announced a 4 per cent reduction in the main rate of corporation tax. The Government is committed to reform of the controlled foreign company rules and will introduce new rules in 2012. Any changes will deliver a more territorial approach, refocusing on artificially diverted UK profits and exempting genuine commercial activities."
The UK's corporation tax rate is 28 per cent, compared to 21.17 per cent in Switzerland and 12.5 per cent in Ireland, the tax residency of WPP and Shire.
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