Once he had set out the latest forecasts from the Office of Budget Responsibility, proposals for Corporation Tax reform presented the most substantive issues of interest for tax advisers.
Full details of the government's proposals are set out in a 100-page (1.9MB PDF) Treasury report, Corporate Tax Reform, Delivering a More Competitive System, which is structured around the following elements:
- Main Corporation Tax rate – a programme of annual phased reductions in the main rate, starting with a cut to 27% in April, leading on to 24% rate by 2014.
- Taxation of innovation and intellectual property - Under a “Patent Box” scheme due to come into effect in April 2013, a 10% rate for profits arising from patents will apply.
- Controlled Foreign Company (CFC) reform, to be preceeded by interim improvements in 2011.
- Foreign branch taxation – a new opt-in exemption regime for foreign branch taxation will be extended to all countries and territories, by reference to existing treaties or OECD model treaties where no such agreement exsits. Companies within the exemption regime will not receive relief in respect of the foreign branch losses.
Draft legislation will be published on 9 December to include a number of interim exemptions from the CFC rules including one affecting “foreign to foreign” transactions where there is no risk of UK profits being artificially diverted. Another will exempt income from intellectual property where the exploitation of that property and the CFC have minimal connection with the UK. There will also be a three-year exemption for foreign subsidiaries that come under the scope of the CFC regime for the first time as a result of reorganisations or changes of ownership. The minimum threshold for chargeable profits that bring a company into the CFC regime will be increased £50,000 to £200,000and the terms for withdrawing exemptions will be relaxed for certain holding companies.
Chris Sanger, head of tax policy at Ernst & Young, commented: “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.”
“There is still work to be done, but before 2012 when the CFC rules are expected to be overhauled. Until then these relaxations are not only welcome but probably essential to keep the UK competitive," Mike Warburton, tax partner at Grant Thornton told the Telegraph.
The Treasury document set out a timetable for the reforms as follows:
Introduce rate cuts in Small Profits Rate and the main rate to 27%
Publish further details of new CFC rules for consultation
Publish further details of the Patent Box for consultation
Finance Bill 2011
Legislate for capital allowances reductions
Legislate CFC rules interim improvements and foreign branch reform
Publish draft legislation on (a) new CFC rules and (b) the Patent Box
Introduce further cut in main rate to 26% and reductions to capital allowances
Finance Bill 2012
Legislate outcomes following consultation on (a) new CFC rules and (b) the Patent Box
Introduce further cut in main rate to 25% and the Patent Box
Introduce further cut in main rate to 24%
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