UK: Corporate tax is down, but will investment go up?

UK: Corporate tax is down, but will investment go up? - When Chancellor Gordon Brown cut the standard rate of corporation tax from 33% to 31% in July, he suggested that companies would respond by increasing investment. After all, the move gave UK compani

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Last Updated: 31 Aug 2010

When Chancellor Gordon Brown cut the standard rate of corporation tax from 33% to 31% in July, he suggested that companies would respond by increasing investment. After all, the move gave UK companies a tax rate lower than that applying in the US, Japan, Canada and the other larger EU member states. The cut in the main rate is expected to save companies £1.4 billion in 1998/99 and nearly £2 billion the year after. Small companies, too, will be £200 million better off in 1998/99 as their tax rate falls to 21% from 23%. But are companies really upping their investment budgets, or has the link between tax and capital spending been overplayed?

Neil Chisman, financial director of Glasgow-based hotel and leisure group Stakis is unequivocally enthusiastic: 'Every pound of tax we don't pay gets invested.' In fact, Chisman says more than that will be invested as a result of the tax cut since the company will borrow more to maintain a stable debt:equity ratio. But most companies are more doubtful. 'If you just had a cut in corporate tax rates alone, then we would think: "Yes, that could be effective",' says Douglas Godden, head of the Confederation of British Industry's economic policy unit. The problem, he says, is that the corporation tax rate cannot be considered in isolation. For example, the loss of dividend tax credits may cause pension funds to seek higher employer contributions or higher dividend payments, so cancelling out the impact of the tax cut. 'So it's unlikely to be of any benefit to larger companies,' says Godden.

Smaller companies, too, have their doubts. For a start the 2% cut in corporation tax applies to limited companies rather than sole traders or partnerships, which still pay 40% tax above around £28,000. In Scotland, where 75% of small businesses are the latter, Bill Anderson, Scottish secretary for the Federation of Small Businesses, says that Gordon Brown would have done better to have allowed unincorporated firms to be taxed at the same rate as the incorporated. However, there will be little clamour for incorporation, he says, because, 'Banks are not happy to lend money to newly incorporated businesses. They don't like them.'

Some companies of course, are so cash rich that they see tweaking of corporation tax rates as simply irrelevant. 'We have never been prevented from undertaking investment by lack of funds,' says Chris Marsay, investor relations manager with chemicals group BOC who argues that cutting corporation tax to boost companies' scope for borrowing will therefore have no effect.

Instead, 'The main determinant of our capital investment programme is the return on capital we expect from projects, whether they are viable commercially,' he says. A spokesperson for Whitbread says categorically that the company's investment decisions have not been influenced by the tax cut. 'It makes no difference to us,' she says. 'Even before the Budget, Whitbread had announced that it was investing £400 million this year,' she adds, 'creating 5,000 jobs in the process.'

It seems that while companies will never complain about tax rates coming down, there are many other elements in the investment equation. The simple single cause-and-effect relationship between tax rates and capital outlays no longer seems appropriate.

Working mothers need more than just creches.

The hand that rocks the cradle is also increasingly picking up the telephone, signing a contract or sending an e-mail. According to a recent report from the Office for National Statistics (ONS), over three out of five families today have both adults at work. And now unfavourable demographic trends are forcing leading UK companies to respond to the needs of working mothers.

These trends include greater female participation in the workforce, an ageing population, fewer young people entering the labour market and increasing numbers of single parent families. 'Companies are having not only to recognise the existence of working mothers, but to learn how to benefit from their potential, as well as how to attract and retain the best people,' comments Liz Bargh, formerly head of Opportunity 2000 and now chief executive of WFD, a consultancy specialising in work/life issues.

But what is it that working parents - typically mothers - actually need from their employers? 'Don't automatically think only in terms of creches. Broadly what is needed is flexibility of hours and conditions, to make it possible to balance work and family, and indeed, other interests and responsibilities outside of the corporation,' advises Rosemary Harper of Executive Development Consultants.

The aim, suggests Bargh, is to match the needs of employees with business objectives. Boots and Abbey National, both of which employ a high proportion of women, have introduced a range of 'family-friendly' policies in recent years including career breaks of up to five years, generous maternity leave, job share and annual hours contracts. Such policies have boosted the maternity retention rate for the two employers. 'As 75% of Abbey National's staff are women, it makes sense to develop policies that encourage the retention of skilled staff,' comments Madeleine Carrington, personnel policy adviser at Abbey National.

As long as the goals are achieved, a growing number of companies care little how or where the work is done. For instance, modern technology makes Motorola's 'office on the move' concept perfectly feasible. Supported by modem, teleconferencing, mobile phone and the like, this system is a response to the demands of employees who, 'are trying to have it all - as parent and as working person', explains human resources director Marsha Carey-Ray. Motorola employees devise flexible working programmes with their managers, working from home when need be. 'It's often not necessary to be in the office,' she says. 'We focus on results. And results are what count.'

Does the UK need the Invest in Britain Bureau?

Although foreign investment in the UK is at an all-time high - up 24% last year to £9.3 billion - questions are being asked about how much of a role the central investment promotion agency, the Invest in Britain Bureau (IBB), has played in landing this. Despite an annual budget of £10.5 million and a brief of marketing the whole of the UK abroad, it is popularly seen as overly bureaucratic, desperately slow and somewhat amateurish in comparison to the more nimble agencies such as Locate in Scotland, the Welsh Development Agency and the Northern Development Corporation.

'The IBB is supposed to be the top of the hierarchy that the majority of foreign investors make contact with,' says location analyst for Roger Tym and Partners, David Keddie, 'but in practice a lot bypass it'.

A split in attitude to the IBB is increasingly seen in the country's investment between the haves and the have nots. The stronger regional development agencies have their own free-standing development structures, and agencies such as the Northern Development Company are both well-established and internationally active in their own right. It is the poorer relations, such as the South West Development Agency in Bristol, who are forced to rely on the IBB. Although the IBB should still be regarded as a front door to the UK, its role, Keddie admits, is 'withering a bit'.

The greatest criticism of the IBB comes from the Welsh. 'Last year there were 126 visits from North American companies to the United Kingdom ...

only 12 included visits to Wales. If we relied on the IBB as our only source of opportunity, we would be out of business,' says James Turner, managing director of the international division at the Welsh Development Agency, adding that not one of the investments recorded in Wales last year originated from the IBB. He believes that it is time for change.

'We have to ask whether UK plc can't get a bigger share of the global FDI market through a diversified approach,' he says, suggesting that the IBB's remit be scaled down. The model he would prefer to see would be that favoured by Germany and Spain. Neither country has a strong IBB equivalent and foreign direct investment is courted on a regional rather than on a national level.

This view isn't shared by some of the customers. Ben Thorn, location agent for Japanese multinational NSK, the world's second-biggest bearing manufacturer, believes that the IBB's coordinating role should be enhanced. In his view, the plethora of regions is not at all helpful to those unused to doing business in Europe. 'The Japanese think Kent is a brand of cigarette,' says Thorn. 'The IBB can paint a national picture, it has larger funds and direct access as part of the Department of Trade and Industry through the embassies,' he adds.

'Japanese companies would much rather have one presentation, and sort it out when they get here, than a number by "one man and his dog".' It is in the IBB's ability to do just this, says Barry Bright, location partner for Ernst & Young, that the organisation's true advantage lies.

He dismisses the claim of being a one-stop shop that many regions are eager to tout as their advantage, saying: 'Everybody wants a one-stop shop, but no one really offers one.' What might work very well for smaller countries such as Ireland or Luxembourg, is simply unrealistic within the UK context.

Time to halt the annual inflation-plus pay rise?

The annual pay round has been a ritual ever since organised labour first started to flex its muscles. At the start of each year, employees would enjoy a pay hike, albeit following months of brinkmanship between unions and management. In this new era of global price stability, the need for a regular inflation-plus pay hike has increasingly come under question.

So why do annual pay negotiations remain so stubbornly in place?

Karen Livingston, media officer for the union GMB, thinks she knows: 'The vast majority of companies have no interest whatsoever in getting rid of annual pay negotiations,' she suggests, 'because they are horrified at the prospect of union demands for commitment to job security in return.' The GMB (along with the T&G) has negotiated just such a deal with Blue Circle because they concluded that guarantees on the latter, the number-one concern for employees, justified concessions on the former. But few, if any, pioneering companies have managed to negotiate away the idea of annual incremental increases, even if they have stopped the need for annual negotiations. Even in the three-year deal with Blue Circle, for example, employees' salaries will still rise automatically, at inflation plus 0.25%.

Finance sector companies have been among the first to ditch the traditional annual pay round negotiations and for Tim Wilson, head of reward management at Lloyds TSB, it is this knowledge that wage costs will not move significantly 'out of line' over the medium term that is vital. 'The old idea that year in, year our, people could rely on an increase of about two or three percentage points above the inflation rate simply isn't sustainable in business terms,' he says. The logic is that anything more than an inflationary rise is a merit rise - and should be seen and handled as such.

Barclays, somewhat controversially, wants the whole workforce to be covered by a performance-related system over the next few years. John Davies, personnel director of Barclays in the UK, argues for the need for pay scales which reward individual performance. He says: 'organisations have to work much harder to keep good staff ... assessing performance is time extremely well spent'. But even Davies acknowledges some drawbacks with individually based systems compared to the old method of granting an across-the-board increase.

Devoting sufficient time and resources is a key issue, agrees Mike Bolsover, head of human resource development at Midland Bank. One of the problems with annual pay hike alternatives, says Bolsover, is that many companies are either too timid with its application or see it simply as a means for cost cutting: 'There would be little point in such a system if the difference between an average performer and someone outstanding was simply £50 a year.'

And yet performance-related systems are criticised for being too divisive if applied too enthusiastically. 'Historically pay processes had everyone somewhere in the middle of the relevant range. But in some companies it is now possible that the differences for a particular job could be as much as 50% or 60%', admits Wilson at Lloyds TSB. It may be that many companies have already concluded that the difficulties in preventing jealousy in the workplace, allied with the difficulties of guaranteeing job security and extra red tape, mean that the annual pay round is still as good a system as any.

The long and short of allowing extended leave

Sabbaticals have slowly become a feature of the global - if not the British - workplace. Although only a small number of employers in the US - about 10% of major companies - offer paid sabbaticals, the opportunity to take extended time off, whether paid or unpaid, has survived surprisingly well in the downsized 1990s. In Australia, sabbaticals are already commonplace. In the Netherlands, sabbaticals will next year become an enshrined right for citizens, and in Belgium, they already are. Furthermore, a survey by the International Foundation of Employee Benefit Plans suggests that a third of all companies worldwide will offer extended leave arrangements by the year 2000. So will sabbaticals soon be a regular feature of British working life? The answer would appear to be a resounding 'No'.

First the exceptions. In Britain as elsewhere, it is now common practice to offer certain IT skill groups the incentive of a year's paid holiday at the end of a four-year contract. Although this use of paid holidays was invented to keep certain IT staff working to the end of specific projects - notably on the Year 2000 problem and EMU conversion - IT specialist Yvette Gray, of recruiters Macmillan Davies Hodes, reckons it is becoming a useful tool in its own right. 'The fifth-year salary bonus is now being looked at by companies throughout the IT sector,' she says.

Away from IT, extended paid leave is relatively rare, and tends to be offered only to long-serving staff. The Royal Mail, for example, allows staff with only two years' service and a good attendance record to take unpaid leave of up to two years. Royal Mail's policy is rare, and Graham Wilson, director of organisational development with Corporate Psychologists International, believes that sabbaticals offered only to long-serving employees are on the way out: 'The current pattern reinforces long-term careers; the change to flexible working patterns means that employers must be more creative in finding ways to recruit, retain and motivate good staff.'

Lester Porter is group director of strategic development and human resources for the Thomas Cook Group, which doesn't offer extended leave. Why not?

'There are concerns about a loss of continuity,' he says. Some have more practical concerns. 'Technology moves too fast. If a research chemist took a six-month sabbatical, for instance, he or she would be out of touch when they came back.' believes Julia Payne, human resources executive at Albright & Wilson.

This fear that the employee will lose touch with the changing workplace is only one reason why many see sabbaticals in a poor light. 'Sabbaticals are so amateur,' says Michael Losey, president and chief executive officer of the Society for Human Resource Management in the US, an association for human-resource professionals. The problem, he says, is that companies 'accept work stress as a given', which they try to counter balance with generous leave programmes. In other words, sabbaticals tackle the symptoms rather than the cause. Those who have suffered sometimes unavoidable stress, or who simply want to travel the world, would beg to differ.

Corporate patronage - the art of getting it right

Listen closely in Whitehall's corridors of power and you may hear a distant shuffling sound: not of soft-footed mandarins going about their business, but of art being moved around. Like every new government, Labour's incoming ministers are busy hanging their political predilections on their office walls. But it is not only in Whitehall that art is used to transmit political messages. In terms of corporate patronage, Britain is catching up with the US, where 30% of new American art is thought to be bought by companies.

What individual corporations hope to achieve from the exercise varies from company to company. Richard Hiscox, CEO of The Hiscox Group of underwriters, takes a pragmatic line. 'It's a way of leaving hard-earned after-tax profits in your corporation,' he says.

Philip Collins - partner in charge of both Coopers & Lybrand's private tax business and of the firm's collection of works by young British artists - adopts a more altruistic approach. 'We certainly don't do it for investment,' says Collins. 'Our collection has a dual aim: to add to the corporate environment by making our building more intellectually challenging, and to give clients an impression of the company as having a wider perspective on the world.' Before you gallop off to Cork Street, though, remember that art is often a matter of personal taste. Bernard Starkmann, CEO of Starkmann Library Services (Germany's largest book wholesalers), has filled his London offices with a collection of extraordinarily edgy artworks, including one piece by Damien Hirst. Starkmann's employees, forced to cohabit with these pearls, have responded distinctly negatively.

'The staff hated the art, and they hated me for inflicting it on them,' says one of Starkmann's (anonymous) ex-buyers.

Better, perhaps, to stick with the more pedestrian approach of telecoms giant Cable & Wireless which, after much musing over what type of artwork would best project the company's image decided only to buy works featuring ... well, cables and wirelesses.

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