Global competition and attempting to reverse the corporate “brain drain”

Date 9th December 2009 For immediate release Subject BDO’s Response to today’s Pre-Budget Report BDO’s Response to Today’s Pre-Budget Report Global competition and attempting to reverse the corporate “brain drain” Although faced with the task of reducing national debt, the Chancellor has realised that ongoing tax increases can result in companies escaping the UK completely by either choosing to establish a subsidiary in another country or moving activities abroad to access lower rates of corporation tax. This is often easy for innovative companies developing new ideas or new technology, which is one of the principal areas Her Majesty’s Government expect the UK economy to develop and grow. Therefore, increases in corporate tax rates can have a negative impact both on the current UK corporation tax take, but more importantly, on the future economic growth of the country. Indeed, the UK already has a higher main rate of corporation tax than many of its European and global competitors. With regard to the corporation tax rate itself, companies investing in the UK from abroad, (particularly US companies seeking to expand into Europe) will, almost invariably, compare the corporation tax rates in various countries. With this in mind, the Government has in recent years reduced the main rate of corporation tax but, perhaps bizarrely, they have been increasing the small companies’ rate of corporation tax. Stephen Herring, Senior Tax Partner, BDO LLP, commented that: “New start ups in the UK are naturally focussed on the small company corporation tax rate, which applies to profits up to £300,000 per annum. Postponing the proposed increase in this rate should help both new and existing small businesses.” In addition to the headline rate, many countries offer much lower tax rates on patent and royalty income than on trading income. The reason for this dual rate is that they are seeking to attract the high tech businesses and the knowledge economy generally and many of these businesses can easily re-locate to lower tax jurisdictions. Accordingly, the Chancellor has proposed today a new 10% rate of corporation tax on patent income aimed at retaining these technology businesses and encouraging them to develop new ideas and technology in the UK. Stephen Herring went on to say: “The proposed 10% lower rate of corporation tax on patent income is very welcome but the Chancellor could have gone further and introduced this rate more quickly. The new tax rate will not be introduced until April 2013, which is a long time for fast changing high tech businesses to wait.” As expected, there is a further range of measures to fine tune the impact of the World Wide Debt Cap but these will not be the last refinements; expect to see an even longer list in the Budget 2010 once the precise impact of this excessively complex legislation has been fully appreciated. Finally, the Government has announced that it will publish a document setting out changes to the Controlled Foreign Company rules. We will have to wait and see what it says according to Stephen Herring: “as the Government should use this opportunity to change the Controlled Foreign Company rules to ensure that the UK can be a “holding company location of choice” for significant international business groups.”