Lifesciences companies have until 22 February 2011 to respond to
a Government consultation on a number of important reforms to UK
corporation tax which could have a significant impact on the
sector. As part of its "Corporate Tax Road Map",
the Government seeks industry views on introducing a "patent
box" regime, reforming the controlled foreign company (CFC)
rules in relation to IP companies, and changing tax credits
available for research and development (R&D).
The Government's stated aim is to provide a more competitive
tax system, with a particular emphasis on activities related to
scientific and high-tech IP.
The patent box
A patent box regime allows profits arising from patents to be
subject to tax at a lower rate than general corporate
profits. This is a new concept in UK corporation tax, and is
intended to apply from 1 April 2013. The suggested rate of
tax for patent income is 10% – much lower than the
current 28% rate of corporation tax.
The idea of a UK patent box was first announced in the Pre-Budget
Report 2009. The Government recognises that IP is mobile and
that multinational groups have a choice as to where to locate their
IP ownership. The aim of the patent box regime is to try to
encourage companies to locate their IP in the UK.
The key beneficiaries of the patent box regime will be the UK's
pharmaceutical and biotech sectors. Government is keen to
engage with businesses that may be affected to try to understand
what the behavioural impact of this reform might be. In
addition, we would encourage companies in the lifesciences sector
to have their say while this consultation is open, as a number of
important issues have yet to be resolved.
One key area of uncertainty is how profits from a patent income
stream will be calculated where the value of a patented innovation
is captured in a product sale price rather than through a discrete
royalty. Other points on which lifesciences companies may
wish to have their say include whether income from foreign patents,
acquired patents and patent pending innovations should qualify for
the lower rate of tax.
Controlled Foreign Companies (CFCs)
The UK's CFC rules seek to prevent international groups from
reducing UK corporation tax by diverting profits into subsidiaries
in a low tax jurisdiction. Many multinationals feel that
these rules go much further than is necessary to tackle this type
of avoidance, and that "innocent" overseas activity can
be caught, unfairly increasing the tax bill for groups based in the
UK. For example, lifesciences companies can face a CFC charge
on profits that arise from IP that was developed entirely outside
the UK – a huge disincentive to locating the top company
in the UK.
It is proposed that the existing CFC regime will be replaced in the
Finance Bill 2012. The Government has specifically been
looking at how this can be applied fairly in relation to IP.
As an interim measure – to be introduced in the Finance
Bill 2011 – there will be an exemption for CFCs whose
main business is to exploit IP where both the IP and the CFC
itself have a minimal UK connection.
The suggested approach for the fuller reform in 2012 is that the
focus will be on "high risk" IP-holding CFCs which have
excessive profits in relation to the activities they have
undertaken. In particular, where IP is developed in the UK,
effectively managed in the UK, or funded from the UK, but in either
case held offshore, a UK CFC charge may be imposed in relation to
profits that are seen as artificially diverted from the UK.
R&D tax credits
R&D tax credits provide an incentive to companies to invest
in research and development by allowing a generous tax deduction
for R&D expenditure. Under the current rules, small and
medium size enterprises (SMEs) are entitled to tax relief at 175%,
and larger companies at 130%, on qualifying expenditure. In
other words, for every £100 spent by an SME, taxable profits
are reduced by £175. A cash payment from HMRC of up to
24.5% of qualifying expenditure can be claimed by SMEs that are in
a loss making position.
Since their introduction in 2000, R&D tax credits are said to
have supported nearly £52bn of R&D activity by UK
companies. While it recognises that the regime is popular and
widely used, the Government is considering whether the R&D
credit system could be improved, and says it welcomes views on any
suggested changes that could affect the impact or delivery of the
schemes. Possible areas for reform include the types of costs
that are eligible for relief, the definition of R&D, the claims
process and a greater focus on start-ups and the smallest
companies.
One feature of the current rules that can produce anomalies is the
cap on R&D cash payments at the total amount of payroll taxes
(i.e. PAYE and NICs) paid by the company. This can put
companies which subcontract a significant amount of the R&D
work at a disadvantage. If businesses want to raise this or
any other issues in relation to R&D tax credits, responses to
the consultation can be made up until 22 February 2011.
Further information
Details of the Corporate Tax Road Map and the consultations described above can be found by clicking here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 25/01/2011.
