REV 2
7 March 2001
A COMPETITIVE AND MODERN TAX SYSTEM FOR MULTI-NATIONALS AND LARGE BUSINESS
The Government is committed to further reform of the company tax system to ensure long-term stability and strengthen the competitiveness of business, the Chancellor confirmed today.
Three strands will be taken forward to secure a competitive environment for business that, with globalisation, can change very quickly:
- A consultation paper will be published in June that will set in a broader context the current proposals for a relief on gains arising on the disposal of substantial shareholdings. Considerable progress has been made on developing this relief. The further consultation will allow consideration of detailed proposals. It will also provide the opportunity to consult business on possible associated reforms aimed at producing a flexible and competitive tax system for parent companies based in the UK;
- A new technical note published today by the Inland Revenue gives details of a proposed new regime for providing relief to companies for the costs of intellectual property, goodwill and other intangible assets. The technical note builds on earlier detailed discussion with business on the design of a more up-to-date regime, and includes draft legislation.
The changes to the regime for double taxation relief (DTR) announced in the Pre-Budget Report will be supplemented by further measures to make the system more flexible for UK-based parent companies. The Government has consulted further with business about the DTR regime over the last year and intends that this dialogue will continue, both on specific aspects and to ensure that the DTR regime fits with other elements of the system for taxing companies.
Commenting on these announcements, the Paymaster General, Dawn Primarolo, said
?These take forward the Government's reforms of the company tax system, and the consultation we now propose offers business an excellent opportunity to shape the outcome.?
The Chancellor also announced a range of measures aimed at providing a more modern environment in which businesses can thrive:
- A consultation document ?Increasing Innovation? examines the case for further measures to boost UK innovation and to seek views from businesses and others on the design of a new tax R&D tax credit aimed at encouraging innovation by larger companies.
- Consultation on the design of a new, targeted tax credit and related measures to encourage development and distribution of vaccines and drugs and to tackle the major killer diseases of the developing world;
- Abolition of out-dated requirements for the deduction of tax on most intra-UK payments between companies of interest, royalties, annuities and annual payments;
- Measures to protect the tax base while facilitating business efficiency and promoting competitiveness.
DETAILS
Substantial shareholdings
1. The Inland Revenue's Technical Notes of June and November 2000 consulted on a deferral relief for gains realised by companies on substantial shareholdings in trading companies. A large number of helpful responses were received. In addition there have been many meetings between representatives of the business community and Inland Revenue and Treasury officials.
2. The deferral relief that has emerged would be much more flexible than that originally envisaged. The present form of the relief is outlined in the Budget Note (REV BN 23) which sets out the significant changes that have been adopted as a result of consultation.
3. The Government considers that the introduction of such a deferral relief would provide a significant advantage to UK companies. Multinationals with UK bases would then benefit from a parent company tax regime that provided: one of the lowest rates of corporation tax among major industrialised countries; generally, relief for interest expense on loans funding investment in the UK or overseas; a system for crediting overseas tax that can substantially relieve tax on foreign dividends; and the opportunity to defer the charge to tax on the disposal of a substantial shareholding in a trading company or group.
4. The consultation now announced will give a further period to assess the detailed deferral proposals and allow them to be considered in a broader context.
5. The UK today is a very attractive location for multinational business for tax and non-tax reasons. The Government is committed to ensuring that this remains the case and recognises that, with globalisation, the competitive environment can change very quickly. A reform package should therefore look beyond the immediate future and reflect the need for flexibility. In this context the Technical Note that was published in November floated the alternative of an exemption, rather than a deferral, for most company gains on substantial shareholdings in trading companies.
6. Many of those who responded to the Technical Note felt that an exemption for gains would be preferable, but recognised that this could have far-reaching implications. One of the main questions that arose was whether an exemption for gains on substantial shareholdings could be introduced without changes elsewhere in the system and this will be important in the further consultation.
7. For example, some felt that an exemption for gains might point to an exemption for foreign income as well. And some were concerned that, in evaluating the options, it should be clear whether the Government's view was that any wider changes might involve some restriction of interest relief where loans were funding investment overseas.
8. The introduction of an exemption for gains and foreign source dividends, together with some form of interest restriction, would bring the UK system closer to that of many other European countries and a reform of that sort could enhance the competitive position of UK companies. But while some UK based multinationals would welcome such changes, others more affected by an interest restriction would probably not. And for Government, the possibility of a new restriction on interest deductibility raises important practical issues.
9. These are important issues for the future direction of company taxation. Business has expressed considerable interest in a broader discussion of this nature and the Government considers that it is right that there should be a full and open discussion of the issues. The Chancellor therefore proposes to publish a further consultation paper in June, which will launch a period of open discussion on the changes that should be introduced and the wider implications for the competitiveness of businesses based in the UK. Underpinning that consultation is a strong presumption in favour of introducing a major new relief for capital gains on the sale of substantial shareholdings in Finance Bill 2002.
Double Taxation Relief
10. Two changes to double taxation relief were announced in the Pre-Budget Report (details in Inland Revenue Press Release REV5/2000).
11. In response to further consultations, further changes are to be made to the provisions in Finance Act 2000. Full details are in the Budget Note (REV BN 24).
12. Two matters in Finance Act 2000 were left to be dealt with by regulations. These were the detailed provisions for the mixing of dividends within a country and for surrendering eligible unrelieved foreign tax around a group. The regulations are now on the Inland revenue website, and business will have a brief opportunity to comment at them (until 19 March) shortly after which they will be made and laid before Parliament.
Increasing Innovation
13. In the Pre-Budget Report, the Chancellor said that the Government would be looking at measures aimed at boosting investment in R&D across business. Last year, the Government introduced new R&D tax credits to encourage research and development by small and medium sized enterprises (SMEs). This provided SMEs with an additional deduction for qualifying current R&D spending over and above the amount deducted in the accounts by raising the effective rate of relief from 100 per cent to 150 per cent.
14. With the publication of ?Increasing Innovation?, the Government is seeking views on the design of a new tax incentive aimed at encouraging innovation by larger companies.
Internal links
15. The consultation paper describes what would be involved in the design of an incremental R&D tax credit incentive. An incremental R&D tax incentive would reward businesses in proportion to their additional R&D expenditure above current levels.
16. The paper outlines the issues that would need to be considered, including eligibility criteria, base periods and amounts, how groups might be dealt with, the treatment of sub-contracted expenditure, and the interaction with the existing SME reliefs. Two main options are described, a CT incremental credit and a wages-based incremental scheme.
17. The Government invites views from businesses and other interested parties on the full range of issues that need to be resolved for such a tax incentive to be successfully introduced. The consultation paper can be found on the Internet at:
External links
Views on the issues raised are sought by 7 June
Simplifying and Protecting the Tax Base
18. The Government is aware that the requirements of the tax system can lower profitability and reduce competitiveness. Unnecessary and outdated tax rules that detract from business efficiency are to be cut. These include abolishing outdated requirements for the deduction of tax on intra-UK payments between companies of interest, royalties, annuities and annual payments. This will increase competitiveness and reduce administrative burdens for businesses.
19. The Government is grateful for the responses to the Technical Note issued at PBR about corporate debt, financial instruments and foreign exchange gains and losses. The reform and simplification proposals were broadly welcomed. Most respondents felt careful consideration of the details over a reasonable time scale was needed. The Government will therefore publish a consultation document in the summer that further develops the ideas raised in the Technical Note in light of the representations. The Government announced today that there will be legislation in a future Bill that will:
- Abolish the separate legislation on foreign exchange gains and losses and merge the provisions, with appropriate amendments, into the legislation on corporate debt and financial instruments;
- Extend the scope of the financial instruments legislation; and
- Deal with the problem in the corporate debt legislation of connected party bad debt.
20. While facilitating business efficiency and promoting its competitiveness, the Government is determined that businesses operating in the UK should pay their fair share of tax.
21. Measures announced today reflect the Government's resolve to ensure that the rules that protect the tax base keep up to date with developments in the domestic and global economy. These include:
- blocking artificial avoidance schemes, which exploit a loophole in one of the exemptions from the UK's Controlled Foreign Company regime;
- closing Petroleum Revenue Tax loopholes relating to decommissioning expenditure;
- changes to clarify the general tax rules, which ensure that Limited Liability Partnerships (LLPs) are taxed as partnerships and measures to prevent tax loss through LLPs.
22. In view of concerns about avoidance in relation to the foreign exchange, financial instruments and corporate debt legislation, consideration is being given to bringing forward targeted anti-avoidance measures in the Finance Bill to address schemes that are exploiting this legislation.
NOTES FOR EDITORS
1. Further information on the measures outlined here and other measures affecting business are contained in the following Inland Revenue press releases and Budget Notes
Press notices:
Internal links
Budget Notes:
REV BN 16 New tax incentives for drugs and vaccines for killer diseases.
REV BN 13 Withholding tax on intra-UK company payments
REV BN 21 Loophole closed in controlled foreign company rules
REV BN 20 Petroleum revenue tax and decommissioning expenditure
REV BN 14 Limited liability partnerships.
REV BN 7 Minor amendments to the rules for chargeable gains of companies.
REV BN 5 Capital Gains of non- resident close companies.
REV BN 9 The proposed Capital Allowances Act 2001.
INLAND REVENUE PRESS OFFICE
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