A radical relaxation of Britain's corporation tax regime was signalled by the Chancellor, George Osborne, in his autumn statement yesterday.
New rules on controlled foreign companies (CFCs) and the so-called "patent box" will, ministers hope, stem the flow of businesses relocating to friendlier tax regimes, especially to Dublin – given that under the terms of the Irish bailout the Republic's competitive 12.5 per cent corporation tax will stay. In most of her EU neighbours it is closer to 30 per cent. Recent high-profile departures from the UK to Ireland include WPP, Shire Pharmaceuticals and UBM.
Mr Osborne told MPs: "In a world in which, increasingly, companies can choose where to locate, these tax measures will make us one of the most competitive places in the world."
Presently, the CFC rules prevent UK-based companies from avoiding the corporation tax by declaring profits in subsidiaries in countries with lower tax rates – unless the holding company also relocates, as many now are.
Having already announced a steady reduction in the headline rate of corporation tax in his emergency Budget in June, Mr Osborne yesterday brought forward a new rule that would allow companies to exempt intra-group transfers from tax from April next year. He also said that interest on debt incurred anywhere in the world could now be treated as tax exempt.
This could kick-start a new range of leveraged corporate deals, if private equity and other investors are able to exploit the new tax advantage in conjunction with funding from countries with ultra-low interest rates. During the boom many criticised the way that the tax system favoured debt over equity finance, thereby encouraging highly leveraged and arguably dangerous deals.
The Government's reforms were contained in a supplementary paper to the autumn statement, and are designed to demonstrate its "commitment to improving the levels of predictability and stability in the tax system". The statement adds: "The Government will ensure significant reforms are designed and planned effectively with fewer small changes and commits to extensive and timely consultation with business."
The indications are that, at a time when UK consumers and benefits recipients are being squeezed by higher tax bills, not least from VAT, companies will benefit from a substantial easing in tax liabilities. The reforms are being consulted on and are due to be implemented in April 2012. Meanwhile, the main rate of corporation tax will be cut to 27 per cent in spring next year, and lowered to 24 per cent in 2014.
Tax experts broadly welcomed the changes. Paul Smith, the head of international tax at Grant Thornton, said last night: "It's a positive step forward and should slow down the rate of companies leaving the UK."
Adrian Rudd, of the Chartered Institute of Taxation, added: "CFCs remain a major administrative burden on multinational corporations, often to no real impact so far as tax yield is concerned. It is encouraging that a timetable to legislate in the 2012 Finance Act has been published. This ought to allow sufficient time for proper consultation."Reuse content