Autumn Statement: Chancellor set to close ‘patent box’ tax loophole

The Chancellor is expected to announce a crackdown in his Autumn Statement on which companies can qualify for the controversial “patent box” allowance that gives businesses huge tax relief.

The patent box allows companies to pay virtually no tax on profits generated from patented goods and services. Its purpose was originally to encourage companies around the world to do their research and development in the UK.

However it has attracted criticism that is also encourages overseas companies to use Britain as a tax haven by artificially housing their overseas patented activities in the UK just to save its tax bill. It helped give rise to tax-driven takeover approaches like that of Pfizer’s bid for Britain’s AstraZeneca, according to some critics.

George Osborne is likely to announce ways of tightening the rules so as to ensure it is genuinely only used for patents that have been researched and developed here. Chris Sanger, EY’s head of tax policy, said: “It’s critical to make sure the UK is a great place to develop research and development. If they get this right, they could accelerate the trend of ‘reshoring’, where British companies who have moved operations to cheaper foreign countries are bringing them back to Britain.”

Other likely announcements will be moves to simplify Britain’s North Sea oil tax system, which is currently seen as punitively high – as much as 81 per cent. The high rates of tax are said by the industry to be putting investors off exploring in what are now difficult oilfields to exploit.

Mr Sanger said: “We have a system where pretty much every oil or gas field has a different tax rate depending on when it was identified. We are likely to see the Chancellor detail a far more holistic tax regime, to encourage companies to stay and not take away the infrastructure for good.”

Tax experts also predict the Chancellor will take more action to close corporate tax avoidance loopholes. He has already said he wants to take action against foreign companies selling over the internet to UK customers.

As part of the reshoring drive, he could take further steps to reduce business rates on UK premises. Last year he offered a £2bn cut to small- and medium-sized enterprises’ business rates. Further help could come with measures to reduce how much rateable values are increased on properties where the business has invested in improving the buildings.

What to expect in the Autumn Statement

Already announced

£15bn into UK roads in the next Parliament, including Stonehenge tunnel

£2bn of extra funding for the NHS

Garden City status for Bicester

Likely

2014 OBR GDP forecast to be upgraded from 2.7% to 3%, 2015 from 2.3% to 2.5%. Reforms to the controversial “patent box” super-low tax treatment for patented products

Devolve Northern Ireland corporation tax rate decisions, more devolution announcements possible

Borrowing for 2014/15 to be revised up by £10-£15bn due to weak tax receipts

Possible

Freeze working-age benefits to 2018

Reform business rates

Pension reforms to include tax cuts for widows and widowers with annuities to inherit

Abolish air passenger duty for children

Rhetoric, but no action, on increasing income tax personal allowance to £12,500 by end of next Parliament

Rhetoric on boosting competitiveness for manufacturing

Export-boosting policies

Tax avoidance measures around loans and derivatives

Review tax treatment of North Sea oil exploration

Leftfield

Reform to inheritance tax rules, bringing nil-rate band from £325,000 (£650,000 for couples) to £1m