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Corporation tax reforms 'lack ambition'

Interim changes to CFC rules set for 2011

New rules on controlled foreign companies (CFCs) are one of the highlights of the Government’s eagerly awaited corporation tax (CT) reform programme, which has been criticised by tax experts for lacking ambition.

The document Corporate Tax Reform: Delivering a More Competitive System, published by HM Treasury, outlines changes designed to increase certainty about the plans for UK business and the country’s competitiveness.

Earlier this year, the Chancellor, George Osborne, announced a cut in the main CT rate from 28% to 24% over the next four years, and a reduction in the small profits rate from 21% to 20% from next April.

The latest measures include a CT ‘roadmap’, which commits to principles that will underpin ministers’ reforms and provides a timetable in which the planned reforms will be carried out.

An interim package of improvements to CFC rules will be introduced in 2011 in an attempt to make them more competitive, and a fuller set of regulations is scheduled to be adopted the following year. The Government has also pledged to legislate for an opt-in exemption for profits earned in foreign branches of UK companies.

In April 2013, the tax system will launch a ‘patent box’: a 10% CT rate on profits from patents, in an attempt to build on the existing research and development tax credit scheme and further encourage innovative companies to prosper.

The Government’s programme of CT changes was broadly welcomed by the tax sector, but it was criticised by some prominent commentators for not being bold enough in its intentions.

The head of tax policy at Deloitte, Bill Dodwell, said, ‘The Chancellor’s proposals could have gone much further if the UK is to create better opportunities for multinationals to carry on activities here.’

He went on to claim that the reduced rate of CT on patents’ profits ‘will apply only to a limited range of activities’ and that ‘the UK’s tax incentives have fallen behind those offered by other European and Asian countries.’

Mr Dodwell’s sentiments were echoed by the head of taxation at the Institute of Directors, Richard Baron, who said, ‘What this document lacks is real ambition. Reducing tax rates is the best, and the simplest, way to improve competitiveness… but even that will not place the UK out ahead of the pack. We need a promise to keep the rate coming down in future years, so that the country is seen to be outstandingly competitive.’

However, Mr Baron acknowledged that a lower CT rate ‘will take pressure off the controlled foreign companies regime, because fewer countries will be lower-tax relative to the UK, and it will take the sting out of any trade-offs that may be necessary in order to move to a more territorial regime.’

Chris Sanger, head of tax policy at Ernst & Young, questioned whether ‘the Government will be able to maintain the course and ensure that the roadmap is adhered to’.

He added: ‘It was notable that the roadmap does not significantly follow the theoretical map presented earlier this month by the Institute of Fiscal Studies, and instead represents a more pragmatic approach to the tax system. The Exchequer Secretary to the Treasury [David Gauke] has stated that simplicity and fairness aren’t mutually exclusive; the CT roadmap reinforces that 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,’ said Mr Sanger.

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