Taxes may be high but France's market is too big to ignore

British public opinion has decided that French SMEs are 'over here' to avoid being over-taxed. The truth of the 'exode' to Kent is more compex than that as Myles Neligan reports.

The UK's relatively lenient tax regime and business-friendly environment continues to tempt small French firms to relocate across the English Channel, but the true scale of the gallic business exodus has been exaggerated.

French concern that high taxes were driving away the country's best and brightest peaked last April when top model Laetitia Casta, who had been chosen to pose for a millenium bust of Marianne, the symbol of the French revolution, left her native Paris to live in London. Like the rest of the UK's expatriate French business community, she cited France's burdensome tax and social security regime as one reason for leaving.

Her departure caused little surprise in French business circles. In France, combined employer and employee contributions towards social security charges gobble up 48% of the employee's gross salary, compared to just 11% in the UK.

France's tax on business profits, set at a flat rate of 36.6% for most small to medium sized firms, also compares unfavourably with the UK's graded corporation tax. Most UK-based SMEs, generating profits of between 10,000 and 300,000 pounds (16,356-490,000 euro), are taxed at just 20%. This rises to a maximum of 30% if profits exceed 1.5 million pounds (2.5 million euro).

Olivier Cadic, who moved his 15-man printed circuit board manufacturing operation Info-Elec from Paris to Ashford in Kent four years ago says: There's simply no comparison between the UK and French systems. Many French business people are no longer prepared to tolerate the situation in France.

Cadic has achieved notoriety in France by launching stinging attacks on the French government from his website. His central charge is that France's tax and social security system is crippling free enterprise. He also lambasts the adversarial attitude of French tax officials.

Cadic says the recent proliferation of French firms through Kent, Sussex and London proves his point. Estimates vary, but the total number of French businesses registered in England is now in the region of 1,600, according to the French embassy in London.

Inwards investment agency Locate-In-Kent says it has persuaded 40 French companies to set up shop in Kent in the past three years, creating an estimated 3,000 jobs. Advent UK, a Paris-based consultancy which specialises in advising French firms wishing to move to cross the channel, confirms that interest is running high among French SMEs.

We are kept very busy, said Advent's Nikki Mollat Du Jourdin, adding that the massive difference between the UK and French tax regimes is by far the most important factor in French firms' decision to relocate. For some of Advent's clients, a sudden tax audit provides the final push, she said.

However, some experts argue that the UK's appeal to French SMEs has been overstated. Neil Mackin of Paris-based consultancy NMK, which advises British firms how to get a foothold in the French market, says the true picture is more complex.

Olivier Cadic is dealing with the issue of the fiscal burden borne by French firms, and I have every sympathy, he says. But the phenomenon of firms moving to England is a marginal one.

Moreover, the traffic isn't one way. France's size and relative prosperity means that larger UK firms who have saturated their domestic market cannot afford to ignore it. Many baulk at the expense of employing staff there, Mackin says, but interest in the French market remains strong.France has a rich and sophisticated industrial base, not to mention 60 million affluent consumers. The country isn't emptying itself; far from it, he said.

The French firms that do make the move to the UK are relatively homogeneous, adds Mollat Du Jourdin of Advent UK. They tend to be young and mobile, and have often already lived and worked abroad. For more experienced businesmen, especially if they have families, moving abroad is a much bigger decision. Very few of the migrant firms are involved in manufacturing, she said. Moreover, the UK won't retain its competitive advantage forever. The strength of the pound sterling against the euro and other currencies makes the UK unattractive as an export base, and currency volatility will be a problem for as long as it stays out of the euro-zone.

Also, the French government has started to ease the total fiscal burden, albeit slowly. Yielding to pressure from the SME lobby among others, Prime Minister Lionel Jospin in April announced an 80-billion-franc (12-billion-euro) cut in taxes, one of the biggest ever achieved.

In another move welcomed by small businesses, French Finance Minister Laurent Fabius this week unveiled a plan to allow small companies to pool their staff savings schemes into funds large enough to invest in the stock market. Under the proposals, which have yet to win the backing of the French National Assembly, the savings schemes would be exempt from tax, and would enjoy significant exemptions from social security charges.

Whether any of this will persuade Cadic to up sticks is another matter. Citing writer Victor Hugo on his website, Cadic declares: Quand la liberté rentrera, je rentrerai!