TheCityUK is pleased to submit its views to HM Treasury in preparation for the 2016 Autumn Statement
TheCityUK is pleased to submit its views to HM Treasury in preparation for the 2016 Autumn Statement. The importance of this Statement—the first since the historic vote to exit the European Union—needs little underscoring. The challenges of policy implementation in the context of an uncertain and changing macro-political and -economic environment are readily apparent; as well as these challenges, it is crucial that policymakers and businesses are attuned to the opportunities that Brexit now presents.
TheCityUK stands ready to support the Government in maximising such opportunities and looks forward to working with you and your colleagues to advance the attractiveness of UK-based financial and related professional services—advancement which will in turn mitigate economic risk and support the broader UK economy. To this end, we offer proposals below focusing on:
- Ensuring that prosperity is better shared throughout the regions and nations of the UK by enhancing the value proposition of regional clusters;
- Maintaining the competitiveness of the labour force;
- Proceeding judiciously with further reforms to tax policy; and
- Stabilising financial markets throughout the Brexit process.
Although early economic indicators have been mixed, it is too early to assess the impact of Brexit on the UK economy—partly because financial and economic indicators may exhibit greater volatility once Article 50 actually triggers Brexit, and partly because data covering the post-Referendum period are still extremely limited. Even when post-Referendum data (and post-Brexit data) are available, they are unlikely to offer a full picture of the impact of Brexit on the economy since the process of exiting the EU is likely to take at least two years, and the effect of the process on key indicators like GDP may well appear with a lag.
Against this backdrop of uncertainty, fiscal policy—including the mooted increase in infrastructure spending—could play an important role in economic stabilisation. Evidence suggests that government spending has a greater positive effect on national income during periods of economic weakness than when economic growth is particularly strong, or at the trend rate. In this context, the financial services sector has a particularly important role to play as the UK’s largest taxpaying sector, with a total tax contribution in 2014/15 of £66bn. UK-based financial and related professional services’ contribution to the economy stems also from the industry’s role as a driver of domestic and export-led growth, and its role as an enabler for the wider economy across the UK. Because of this, and in light of the current uncertainty—which, if prolonged, could lead businesses to activate contingency plans and consider investing outside the UK—we offer the following policy proposals designed to facilitate the industry’s ability to maximise its positive contribution to the UK economy.
Proposal #1: Reinforce the value proposition of UK regional clusters
Automation and offshoring have already put pressure on financial and related professional services jobs in the UK’s regions and nations, particularly in firms’ back offices; banking and insurance employment across the UK has declined since 2010, with areas outside London experiencing a drop of around 3% annually. The vote to exit the EU could potentially pose further challenges to the regions—for example, the reduction or elimination of access to the European Regional Development Fund, additional pressure on government spending in the wake of potentially slower economic growth, and the risk of reduced foreign investment into regions. Given this combination of actual and anticipated factors, it will be critical to accelerate efforts to build local capabilities to support regional innovation, growth and job creation. The EU Referendum result poses risks for the regions, but also presents the possibility of a new policy framework that puts the UK regions to best advantage in an increasingly globalised world. For example, educational institutions such as universities and colleges, as well as Local Enterprise Partnerships and firms, should co-operate at scale to identify and act on the next wave of opportunities to grow regional employment. Specific actions could include continuing to invest in regional infrastructure, incentivising the commercialisation of university researchers’ innovations, creating joint appointments in industry and academia, and building initiatives to provide start-ups and SMEs with access to technical expertise. Additionally, strengthening the identities of specialist clusters through single contact points for each regional centre, promotional materials presenting the UK’s regional centres as complementary parts of a coherent narrative, and the development of a value proposition for investor firms would mitigate some of the downside risk currently associated with FDI inflows. Synergies between the work of the Financial Services Trade and Investment Board, the Department for International Trade, regional promotional bodies, and the devolved authorities could also be exploited further to provide more commercial opportunities for financial and related professional services and highlight the attractiveness of the UK as a destination for inward investment.
Proposal #2: Prioritise policies that maintain the competitiveness of the UK’s labour force
To maintain the competitiveness of the UK as the world’s leading global financial centre, UK-based firms—both domestic and foreign-owned—need the flexibility to employ the best people at different stages in their careers. Businesses also need the same freedom and flexibility to deploy their staff abroad – vital to international business operations. A flexible labour market and a highly skilled workforce are among the UK’s greatest competitive advantages; taken together, they comprise a crucial part of the supportive business environment that enables UK-based companies to thrive and invest not only in London, but in cities throughout the UK.
The UK-based financial and related professional services industry has benefitted hugely from the ability to attract the best employees from around the world at different stages of their career. It has allowed the sector to grow nationally and now employ a record 2.2m people—with two-thirds of those based outside the M25. But the industry also recognises that it has an important role to play in this regard. It has made a strong contribution by, for example, providing internships and apprenticeships. It must continue to do so, for such training schemes provide near-term benefits to the industry but also to the individuals involved as their practical knowledge and on-the-job skills are deepened. But this deepening means, in turn, that the longer-term benefit accrues to the UK economy as a whole, as the overall quality of human capital is improved. In particular, the industry must also start to develop a talent pipeline in the skills of the future, such as data science and cyber security.
This means that in the wake of the EU Referendum, Government and industry should agree an approach to the retention, sourcing and movement of critical talent between the UK ,the EU and internationally. Access to highly-skilled talent in the various financial and related professional services sub-sectors is essential to the UK’s ability to remain a leading global financial centre. Additionally, the industry and government must continue to work together to address bottlenecks in skilled immigration more broadly. This is particularly important for the fast-growing, high-value areas of technology and FinTech; financial and related professional services’ competitive advantage will be weakened if expertise in new technologies and international markets is diminished through limits on skilled immigration. The Government could facilitate the availability of the needed skills by, for example, ensuring that technology talent is on the Shortage Occupation list for Tier 2 visas, reducing visa restrictions for entrepreneurs and foreign technology students, and instituting a scheme that allows UK-qualified foreign graduates in technology to work in the UK.
Proposal #3: Put the introduction of sensitive domestic tax measures on hold until there is more certainty over Brexit
Demonstrating that the UK remains open for business and is an attractive place in which to base operations will be critical to sustaining growth and job creation throughout the UK during this period of uncertainty. At this time, clarity and stability of the tax system is critical and the government should not introduce sensitive tax changes at this moment of transition.
There are a number of current proposals that have the potential to give rise to rules which could make the UK a less attractive business location. There are significant “First Mover” risks if the UK proceeds with implementing the OECD’s recommendations on interest deductibility (BEPS Action 4). Both the OECD and ATAD proposals contain options, and by being a first mover the UK could be at a competitive disadvantage if later movers introduce different rules.
Likewise, whilst there are aspects of current consultations which are welcome (for example, the increased loss flexibility), some aspects introduce issues for companies. As you may be aware, the loss reform proposals may cause material adverse impacts to the solvency position of insurers. Where particular sectors are already being affected by the referendum, it does not feel the right time to be introducing additional major tax changes which exacerbate this and impact negatively on UK competitiveness. A period of reflection and consultation on these and other tax measures with potential unintended consequences would be welcomed in the current environment. Furthermore this legislation will be complex and, based on past experience, will require a significant amount of time to design and is likely to involve amendments in Finance Bills to come. This will further add to the uncertainty and will not provide businesses with clarity or stability.
We also think that it is important to ensure that measures which significantly increase the compliance burden or introduce business uncertainty are appropriately targeted, so that they do not impact adversely on the UK as a choice of location for business at this time. For example, whilst we are entirely supportive of the policy objectives behind the proposals on strengthening tax avoidance sanctions and deterrents, we are also aware of concern about the unintended consequences of the proposals. It is critical that business is able to get appropriate professional advice. This is an example of a policy which might unintentionally make the UK less welcoming to business. It will be important to understand how these proposals would work in practical terms.
Supportive tax measures could help mitigate any potential economic losses stemming from Brexit. For example, the substantial shareholding regime is an example of a very positive piece of tax legislation which actively encourages inward investment into the UK by removing tax charges which would otherwise make the UK’s regime relatively less attractive. Eliminating areas of ambiguity in the legislation, as proposed in the Substantial Shareholding Exemption consultation earlier this year, is a key opportunity to maximise the law’s effect by ensuring that companies can make their location decisions in the confidence that the relief will be available.
Furthermore, depending on the outcome of Brexit negotiations, companies may in coming years need to change their operating, legal and regulatory structures, and the work required to assess the impact of different options, including the tax consequences of each, is significant. It will be crucial for the Government to work with industry on a roadmap during the transition period which helps prevent decisions that include but are not limited to relocation.
Proposal #4: Ensure clarity and stability throughout the Brexit process
The specific issues discussed above all sit against the broader backdrop of Brexit. It is therefore imperative that the process of exiting the EU is orderly, taking into account a clear-eyed view of the content of the UK withdrawal agreement as well as the content of the framework for the UK’s future relationship with the EU. An orderly exit is essential for financial stability in both the UK and the EU-27, as well as for the global economy; UK, European and global companies look, after all, to London for capital-raising and advisory work. The Government should therefore continue its focus on policies and clearly-calibrated courses of action that will be conducive to stabilising markets over the long term. Ensuring an orderly exit by triggering Article 50 after a period of discussion with stakeholders and a public debate will contribute to this objective.
TheCityUK believes that negotiating an effective relationship with the EU that maintains mutual market access will offer lasting benefits. It will be important to ensure that UK access to the Single Market remains as close as possible to its current level of access to ensure that UK-based financial and related professional services businesses can continue to trade freely with the EU-27, and vice-versa; and that mechanisms approximating Single Market passporting remain. Research by Oliver Wyman commissioned by TheCityUK estimates that in a scenario that offers only low access, the long-term impact could potentially be large, with approximately £32-38bn in financial and related professional services revenues, £8-10bn in tax revenue from the industry, and employment of 65,000-75,000 potentially at risk. Alternatively, if a high degree of access were to be retained, losses are likely to be much more limited, with approximately £2bn in revenues, £500m in taxes, and 3,000-4,000 in employment at risk.
In addition, the industry must work with stakeholders to ensure that the transitional arrangements after the end of the two-year Article 50 period are clear and support members, their customers and general financial stability. Clarity is needed not only on the shape of these arrangements, but also on the timing. These transitional arrangements should act as effective stepping stones to the new relationship. The longer the period of uncertainty, the greater the likelihood that individual firms will feel compelled to review the structure of their business operations, and we would therefore urge as much certainty on transitional arrangements as soon as possible.
Chief Executive, TheCityUK
 For example, official GDP data for the July-September quarter will be released on 27 October.
 The Economics of Fiscal Policy, TheCityUK, October 2015.
 UK financial and related professional services: meeting the challenges and delivering opportunities, TheCityUK, August 2016.
 Moreover, immigrants from the EU-27 have made a significant positive economic contribution. For example, between 1995 and 2011, EU workers made a net positive contribution to UK public finances worth over £4bn. For further detail, see UK financial and related professional services: meeting the challenges and delivering opportunities, TheCityUK, August 2016, and Demographics, Growth and Financial Services, TheCityUK, February 2016.
 The low-access scenario is defined as one where the UK moved to a third-country agreement with the rest of the EU, without any recognition of regulatory equivalence. The high-access scenario is one which includes full passporting and equivalence.