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In his autumn forecast statement, the Chancellor made announcements concerning the following items:-
The Government proposes to introduce new rules concerning CFCs in order to modernise the system in order to be more competitive. The UK’s corporate tax system should focus more on taxing the profits from UK activity rather than attributing the worldwide income of a group to the UK to determine the tax base. Moving towards a more territorial system in this way will better reflect the global reality of modern business and will allow businesses based here to be more competitive on the world stage supporting UK investment and jobs.
A summary of the proposals are detailed below:
- Introduce a mainly entity based system that will operate in a targeted way by bringing within a CFC charge only the proportion of overseas profits that have been artificially diverted from the UK. A number of exemptions will be designed to minimise compliance burdens and focus attention on higher risk entities. In addition, where needed, rules will be designed to address specific sectors including banking, insurance and property. The Government will work to deliver these changes and will publish further details in spring 2011.
- Introduce a partial finance company exemption that allows groups to manage their overseas financing operations more efficiently while protecting the UK tax base. The exemption will work by considering the finance company’s debt:equity ratio and applying a CFC charge to the extent that the company has excess equity. This is a pragmatic way of protecting the UK tax base while exempting a significant proportion of overseas finance income;
- Exempt incidental or ancillary interest income which arises within trading companies. It is proposed to extend the finance company exemption proposals to apply to excess cash held in trading companies; and
- Introduce a new approach to manage the risks arising from CFCs with IP related profits. This works by identifying those CFCs which present the highest potential risk and then determining whether “excessive profits” have arisen in those entities and, if so, what proportion represents artificially diverted UK profits.
The full consultation document can be viewed at:
http://www.hm-treasury.gov.uk/d/corporate_tax_reform_part2a_cfc_reform.pdf
The Government intends to introduce a 10 per cent rate for profits arising from patents, to apply from 1 April 2013. The Government wants to provide an effective incentive to create and retain Intellectual Property (IP) in the UK, but believes that it is not necessary to match the rates offered by other countries in order to be competitive, given the significant non-tax strengths of the UK as a location for IP development and exploitation. The document suggests that a rate of 10 per cent strikes a good balance between affordability and competitiveness.
Some industries have very long development cycles and therefore hold existing valuable patents which have not yet been commercialised. The Government therefore intends that all patents first commercialised after 29 November 2010 will qualify for inclusion in the Patent Box.
In order to align with policy objectives and remain affordable, the Government believes that the Patent Box should apply to net patent income after associated expenses, including pre-commercialisation expenses, rather than to gross income.
The full consultation document can be viewed at:
http://www.hmtreasury.gov.uk/d/corporate_tax_reform_part2b_innovation_and_intellectual_property.pdf
Glaxosmithkline, which has a manufacturing facility in Cumbria at Ulverston, have said that the Patent Box proposals are good for them, and will ensure that their planned new facility for biopharmaceutical manufacturing will be in the UK. They will be including Ulverston in their shortlisted sites, which is good news for the Cumbrian economy.
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