UK Chancellor of the Exchequer George Osborne on Monday announced a 10% tax
on patent income to encourage high-tech business
“to invest in the UK and create high-value jobs here."
The proposal to tax income from newly commercialised patents at 10% from 2013 was welcomed by the pharmaceutical industry but
as usual, there were demands for an extension of coverage.
The new tax doesn't apply to royalties and brands - - is there a single
method of valuing a brand?
Chris Sanger, head of tax policy at Ernst & Young said: “Despite
pressure from UK businesses, the Coalition has retained the policy of the
previous government in relation to the development of a UK patent box. The
reduced rate of tax will continue to only apply to patents, rather than a wider
range of intellectual property such as royalties and brands, but will now cover
imbedded patent income.
“This will be a disappointment to multinationals outside of the pharmaceutical
industry, but perhaps not a surprise given the messaging to date and the state
of the public finances.
“For IP (intellectual property), other than patents, migrating the assets
offshore will probably be caught by the new CFC (Controlled Foreign Company)
rules, but multinationals may be tempted to build new centres of development in
other, more attractive, countries.”
Osborne told MPs that the UK biggest drugs company GlaxoSmithKline
planned to create 1,000 jobs in
the UK during the lifetime of projects that would take place as a result
of the policy. GSK said it planned to construct a £10m “green chemistry”
laboratory at the University of Nottingham and a £50m venture capital
fund, in addition to a £500m Hertfordshire manufacturing centre and biopharma
plant it announced when the patent box proposals were put forward last
The Treasury also launched a review of the R&D tax credit regime.
Ireland has a tax exemption on patent income
and patents are parked in Ireland by multinational companies to take advantage
of the benefit, even though the research and development work may have been done
The government also on Monday published details of its
Corporate Tax Reform programme consisting of a series of essential
reforms designed to improve the UK’s tax competitiveness. Measures
include the introduction of new Controlled Foreign Company (CFC) rules.
The government wants Britain to be a place for businesses to
invest. That is why it said the June Budget announced the reduction of
corporation tax for large and small businesses with a cut in the main
rate from 28% to 24% over the next 4 years and a reduction in the small
profits rate from 21% to 20% from April 2011.
However, the government said it recognises that a competitive
corporate tax system is not just about rates. That is why the government
has published the document ‘Corporate Tax Reform: delivering a more
competitive system’. This document is designed to provide certainty to
business over the government’s plans, as it works with them to deliver
this ambitious programme of reforms.
Today’s tax reform announcements include:
- a Corporate Tax Road Map that commits to principles that will
underpin these reforms and a clear timetable to deliver these
changes, including how the government will engage with business at
each stage of policy development;
- details on how the government will reform the UK’s outdated
Controlled Foreign Company (CFC) rules by introducing more targeted
rules in 2012 and how they will apply to financing and intellectual
property. As a first step to make the rules more competitive, a
package of interim improvements will be introduced in 2011;
- introducing a patent box in April 2013 - - a 10% CT rate on
profits from patents, reaffirming the Government’s commitment to
retain and build on the existing Research and Development (R&D) tax
credit scheme to create the right environment for innovative
companies to prosper;
- a commitment to legislate an opt-in exemption for profits earned
in foreign branches of UK companies in 2011. Under this more
territorial approach, companies in the new regime will no longer be
subject to UK CT on their foreign branch profits.
The Exchequer Secretary to the Treasury, David Gauke MP said: “In
recent years, too many businesses have left the UK amid concerns over
tax competitiveness. It’s time to reverse this trend. Our tax system
was once viewed as an asset. And it needs to be an asset again."
“That is why the Government is prioritising corporate tax reform.
Responding to the concerns of business, the UK is headed for a more
competitive, simpler, and more stable tax system in the future,
creating the right conditions for investment”
Chris Sanger of Ernst and Young added: “The Corporate Tax (CT) Roadmap, released today, has set the direction that the
government wishes to take the UK tax system. It focused on a competitive and
stable corporate tax system, with the hope that these key elements will
ultimately result in greater investment in the UK. However, the big question is
whether the government will be able to maintain the course and ensure that the
road map is adhered to.
“It was notable that the roadmap did not significantly follow the theoretical
‘map’ presented earlier this month by the Institute of Fiscal Studies, and
instead represented a more pragmatic approach to the tax system. The Exchequer
Secretary to the Treasury has previously stated that simplicity and fairness
aren’t mutually exclusive and the CT Roadmap reinforces this approach.
“That said, the UK’s corporation tax rate will still remain some way behind some
of its competitors, but the government clearly believes that other aspects of
the tax system, such as certainty and a favourable loan interest regime, will
overcome this disadvantage.”