In November 2010, the United Kingdom’s Coalition Government published its “Corporate Tax Road Map”, setting out proposals to reform the UK corporate tax system over a five-year period. The Road Map’s stated aim is to create “the most competitive corporate tax regime in the G20”, and evidence is mounting that the United Kingdom is close to achieving that goal.
The Road Map endorses explicitly two guiding principles for corporate tax reform. The first is to lower the rate of tax while broadening the base on which that tax is charged; businesses focus not only on the headline rate, but also on what is taxed and relieved. The second is to move closer to a “territorial” system of tax, concentrating on income earned in the United Kingdom.
In practice, a third principle is implicit in the reforms. The greatest competition between nations is for mobile income, and the proposals seek to make the United Kingdom competitive in this area, at least where it is likely to result in jobs in the country.
So, how competitive is this new regime? The United Kingdom now of fers the following:
- A corporate tax rate of 24 per cent, reducing to 22 per cent by 2014. The Government has signalled that, if feasible, the long-term aim is to reduce the rate further, to 20 per cent. By 2014, the United Kingdom will have the lowest corporate tax rate in the G7, lower than Canada, France, Germany, Italy, Japan and the United States. No tax on dividends paid from overseas to the United Kingdom. The UK system encourages non-UK profits to be repatriated to the United Kingdom. Since 2009, the vast majority of both UK and foreign dividends have been exempt from UK corporate tax.
- No withholding tax on dividends. Profits earned by a UK multinational’s overseas subsidiaries can be distributed to the United Kingdom and paid on to the ultimate shareholders, with no UK corporate or withholding taxes.
- An extensive double tax treaty network. A generous regime for the deductibility of interest. While many European countries have restricted, or propose to restrict, the tax deductibility of interest, the United Kingdom continues to provide a deduction for arms’ length interest costs in most commercial situations.
- A more restricted regime for “controlled foreign companies”. From 2013, the retained profits of overseas companies controlled by a UK company can only be taxed in the United Kingdom if, broadly, they represent profits diverted from the United Kingdom. Additionally, interest earned by those overseas companies is taxable at a reduced rate, provided it has not resulted in a UK tax deduction.
- An exemption for branch profits. Subject to anti-avoidance rules, a UK company may elect for its branch profits to be exempt from UK tax.
- A “Patent Box” regime and research and development (R&D) tax credits. From April 2013, UK companies can elect into a new regime that applies a lower rate of corporate tax to profits from UK and EU patents. The relief will be phased in over a five-year period, culminating in an effective rate of 10 per cent for such income. Rules exist that effectively require the company, or its group, to have been involved actively in the development or exploitation of the patent. Qualifying R&D can also attract repayable tax credits that are particularly generous for smaller companies.
In combination, these features make the United Kingdom a highly attractive regime for companies, particularly given the country’s other advantages, such as its infrastructure and capital markets. Some companies that exited the United Kingdom when the regime was less attractive have returned, while others have moved or are planning to move there. The path set out in the Road Map appears, for now, to be heading in the right direction.