Policy paper

2010 to 2015 government policy: business tax reform

Updated 8 May 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

This is a copy of a document that stated a policy of the 2010 to 2015 Conservative and Liberal Democrat coalition government. The previous URL of this page was https://www.gov.uk/government/policies/making-corporate-taxes-more-competitive. Current policies can be found at the GOV.UK policies list.

Issue

The main aim of the tax system is to raise revenue, providing the essential stability that businesses need to grow and succeed. At the same time, we believe the tax system can and should be an asset for the UK, improving the business environment and helping to attract multinational businesses and investment to the UK.

Actions

We published the Corporate Tax Roadmap in 2010. It explained how we plan to make the UK corporate tax system more competitive. Since then, reforms have included:

• reducing the main rate of corporation tax from 28% in 2010 to 20% by 2015, the joint lowest level in the G20
• cutting the rate of corporation tax for companies with small profits from 21% to 20%
• changing the way the UK taxes overseas profits to concentrate on taxing profits from UK activities
• introducing a new ‘Patent Box’ which means a tax rate of 10% will apply to profits from the development and exploitation of patents
• improvements to the design and generosity of the UK’s research and development relief schemes, providing greater support for the innovative investment of both small and large companies
• providing £100 million in tax reliefs for creative and high-tech industries
• doubling the amount of investment businesses can receive a 100% up front tax relief on, known as the ‘annual investment allowance’, from April 2014 to December 2015 to help benefit small and medium sized firms

To encourage business investment and support growth, we increased the Entrepreneurs Relief lifetime limit from £2 million to £10 million.

Entrepreneurs Relief means you get taxed at 10% if you sell all or part of a business, instead of the normal rate of 18% or 28%. Increasing the lifetime limit reduces a barrier to serial entrepreneurs who want to grow their business and reinvest gains, helping to make the UK a more attractive location for entrepreneurs.

The Employment Allowance, introduced in April 2014, reduces the cost of paying Employer National Insurance Contributions by up to £2,000 for businesses and charities.

We have also introduced the Seed Enterprise Investment Scheme, which offers generous tax relief incentives to investors in business start-ups.

Background

The UK now has a lower main rate of corporation tax than any other country in the G7. As part of our commitment to tax simplification, we are also unifying the main rate and the small profits rate of corporation tax in 2015 so there is a single headline rate of 20%.

Read about how we are creating a simpler, fairer tax system, including details on the new employment allowance, as well as how we are reducing tax avoidance.

Appendix 1: changing the way the UK taxes overseas profits

This was a supporting detail page of the main policy document.

Globalisation has meant that the world’s markets have become more open. As a result companies increasingly work across national borders and the ownership of UK businesses has become more internationally diverse.

To be more competitive, the UK’s corporate tax system is focusing more on profits from UK activity, rather than the worldwide income of a group.

To recognise this, we’ve made changes to our Controlled Foreign Company (CFC) rules. These were set out in the Corporate tax road map and came into effect January 2013.

The CFC rules are essentially anti-avoidance rules designed to prevent a company from artificially moving its profits abroad, to a country with a more favourable tax rate.

The CFC rules have been modernised to better reflect the way business operates in a global economy.

The new rules only tax profits which have been artificially diverted from the UK, whereas the old rules would also catch profits diverted by a CFC from any other country.

This allows businesses based in the UK to be more competitive internationally, creating more investment and jobs.

Appendix 2: main corporation tax rate

This was a supporting detail page of the main policy document.

The rate of corporation tax is important to the UK’s competitiveness. Reducing corporation tax rates benefits businesses across the economy and can boost investment and growth.

We have already cut the main rate of corporation tax from its 2010 level of 28% to 21%, and by April 2015 it falls to 20%, as announced at budget 2013.

The UK now has the lowest rate in the G7, and by 2015 will have the joint lowest rate in the G20. We have also reduced the small profits corporation tax rate – paid by companies with annual profits of up to £300,000 - from 21% to 20%.

In 2015 we will unify the main rate and small profits rate, creating a single main rate of corporation tax at 20%.

Appendix 3: updating international tax standards

This was a supporting detail page of the main policy document.

The government is committed to creating a competitive tax system in the UK, but at the same time it does not expect businesses that operate in the UK to pay no tax.

The international Organisation for Economic Co-operation and Development (OECD) has been commissioned by the finance ministers of the G20 countries, to update the international tax rules that it oversees, to reflect modern global business practices.

The OECD has been asked to close the gaps which allow some multinational corporations to avoid paying tax by shifting profits away from the location where the activities creating those profits take place.

This is called the base erosion and profit shifting (BEPS) project.

To ensure the fairness of the international tax system, the BEPS project will provide a coordinated, comprehensive approach to create a level playing field for all taxpayers.

At the G8 summit in June 2013, G8 leaders called on the OECD to draw up a template for multinational corporations to report to tax authorities on where they make their profits and pay taxes around the world.

The government set out the UK position on the BEPS project at Budget 2014. The first set of outputs from the project were published by the OECD in September 2014, and the final recommendations will be made by the end of 2015.

At Autumn Statement 2014 the government published a consultation on the UK plans for implementing the G20 and OECD agreed rules for neutralising hybrid mismatch arrangements to prevent multinational companies from avoiding tax through the use of certain cross-border structures or finance transactions.

At Autumn Statement 2014 the government also announced it will introduce the G20 and OECD agreed model for the country by country reporting template.

This will give tax authorities around the world a new tool against tax avoidance by multinationals.

Appendix 4: innovation and investment

This was a supporting detail page of the main policy document.

Patent Box

The Patent Box was set out in the Corporation tax road map and confirmed in the 2010 Budget to encourage innovative businesses to invest in the UK and to improve the competitiveness of the UK tax system for high-tech companies.

It gives a reduced 10% rate of corporation tax on profits from patents. It came into effect in April 2013, and is being phased in over 5 years.

New international rules around patent boxes and other preferential intellectual property (IP) regimes are currently being discussed in the OECD. The intention is to reach an agreement on these during 2015, so that they can be introduced from July 2016.

Research and development tax credits

We believe that research and development (R&D) tax credits play an important role in supporting innovation in the UK.

At Budget 2011, we made changes to simplify the scheme, remove barriers to early-stage companies and start-ups claiming the credit, and provide greater certainty on the costs qualifying for relief.

Following consultations with a number of large companies on R&D tax reliefs we announced at autumn statement 2011 an ‘above the line’ credit to provide a £250 million per year boost for companies.

At Budget 2013 we announced the credit would be available at 10 per cent. This came into effect in April 2013.

This increases the visibility of R&D relief, and improve finances and cash flow for companies with no corporation tax liability.

At Autumn Statement 2014, we announced that from April 2015 we would increase the rate of the ‘above the line’ credit from 10% to 11%. We also announced we will introduce an advanced assurance scheme for small companies making their first claim, and develop new guidance.

Around 2,450 companies will benefit from the relief.

Tax reliefs for creative industries

The UK is a world leader in the creative industries. To make sure that UK businesses receive the right support to maintain this status, we’ve announced tax reliefs for these sectors.

Relief for animation and high-end television industries came into effect in April 2013, with video games following in April 2014.

At Autumn Statement 2013, we announced plans to introduce a new support for theatres from April 2015 that recognises the unique value that the theatre sector brings to the UK economy.

At Autumn Statement 2014 we announced plans to extend support to orchestras and children’s television.

Helping companies invest in plant and machinery

At Autumn statement 2012 we announced an increase in the annual investment allowance from £25,000 to £250,000 for two years from January 2013.

At Budget 2014, we doubled this again to £500,000 from April 2014 until 1 January 2016, to further support businesses investing.

The annual investment allowance gives firms 100% allowance on investment in qualifying plant and machinery up to its threshold. At £500,000 this covers the total qualifying investment of over 99% of firms, or 4.9 million businesses.