The United Kingdom undoubtedly has its attractions as a place for overseas companies to do business. There are a number of factors at work but what of our business tax policy?
The Coalition Government is keen to maintain the UK’s competitiveness amongst the G20 nations. In November 2010 the Treasury published a document ‘Corporate Tax Reform – delivering a more competitive system’ to demonstrate its intention to enhance the UK’s tax competitiveness.
The headline rate of corporation tax is the main weapon deployed. This was to be reduced from 28% to 24% in equal annual stages. But the surprise announcement in the 2011 Budget was the immediate reduction to 26% for 2011, followed by a fall to 25% in 2012 and further annual reductions intended to achieve 23% by 2014.
When I speak to overseas investors, these rates are certainly attractive. There are also some other factors which are welcome and often not appreciated. The fact that the UK does not generally withhold tax on dividends paid overseas means that corporate profits can be remitted overseas having borne UK corporation tax only.
The UK generally allows interest to be deducted against taxable profits, subject to OECD arms length principles as set out in the transfer pricing rules. These can be complicated for large companies, but there are generous exemptions for Small and Medium sized Enterprises (SMEs).
2011 is marked by a huge volume of consultation on improving the UK corporate tax system. For example: reforms to intellectual property income and the proposed ‘patent box’ 10% corporation tax rate, and proposals to improve research and development allowances.
Do these reforms go far enough to maintain UK’s tax competitiveness? The general reduction in corporation tax rates is welcome, but some commentators say the reforms do not go far enough. This is of course a difficult balance, and the headline rate of tax has to be paid for.
The message that the UK is open for international business will need to be backed up by substance and not just headlines.