Businesses seem to be feeling more relaxed about Brexit, but does this mean they are confident enough to make big bets on UK investment, asks Tim Sarson.
The intent behind the transition deal between the EU and UK was to give businesses more certainty. By giving companies some breathing space, they would then feel more confident and be more likely to invest in things like machinery, offices and labs. (It gives government departments a bit of time to get their houses in order too).
And anecdotal evidence suggests business people are certainly feeling calmer a month or so later. But are they confident enough to make big bets on UK investment? I’m not sure they are just yet.
That’s principally because although transition reduces the uncertainty (at least in the short term) so loathed by business, it doesn’t resolve the fundamental, longer term question of how to deal with increased costs and friction at borders or finding the best staff. Indeed some clients have said transition only extends the unwelcome limbo in which they find themselves and makes significant investment decisions more difficult.
I don’t yet see a fundamental reappraisal of the UK’s pull as an investment location thanks to transition.
This picture of Britain’s attractiveness is set out in KPMG’s annual Tax Competitiveness Survey. The poll - conducted before the transition deal was announced – shows that, in broad terms, the UK maintained its relative ranking alongside major rivals such as Ireland, Singapore and the Netherlands in 2017, after a Brexit-induced shock in 2016. Tax reform in the US doesn’t (yet) seem to have shifted the dial in their favour.
What concerned me more was that while companies already operating here were generally positive about the UK as an investment location, for those not operating in the UK, its FDI attractiveness remained weak after tumbling down the league table in 2016. That suggests the country’s issue is more one of branding – nothing catastrophic; the survey results are okay – but we all know that brand reputations are hard won, and quickly lost.
The other point we should note in the survey was the reason why the UK maintained its No.2 ranking: namely because the country remains a very attractive location for tax residence and holding companies. When it comes to ‘real’ economic activity – things like manufacturing, regional head offices, R&D and Treasury – the survey suggests more firms are looking to move out than move in.
And that brings us back to Brexit. Of the 42% of companies which described Brexit as their biggest strategic challenge, around half said that it would lead them to reduce headcount and lower capital expenditure, while a third of this group said their R&D spend would fall too.
To which some might add, “well they would say that, wouldn’t they?” Most respondents continue to call for Single Market and Customs Union membership too. But I know from experience that micro investment and divestment decisions are made and re-made, in their thousands, every day. Each one based on an unpredictable mix of sentiment, hard facts and corporate inertia. Net inward investment is the cumulative effect of millions of these little decisions.
It’s far too early to determine what impact the announcement of a 21-month transition period will have. The final deal will be far more significant in influencing the decisions companies ultimately take - whether they be British, foreign subsidiaries or those not yet here. And the eventual upshot will not be clear for several decades yet.
My advice to anyone weighing the decision right now would be to maintain a broad view: good location decisions are rarely about one factor alone. The availability and cost of skilled labour is vital (it was the No.1 criteria in the tax survey), while issues such as market size, the tax regime and, increasingly, geo-political stability should all be front of mind.
Above all diversify. If Brexit, trade wars, hurricanes or ransomware attacks teach us anything, it’s that putting all our eggs in one basket rarely makes sense.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders
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