I recently overheard someone use the expression “be careful of what you wish for”.
From a tax practitioner’s perspective it reminded me of the recent kafuffle about the extent that the public should keep receipts for all cash payments. We had the Labour Shadow Business Secretary, David Gauke, Ed Balls, David Cameron and a host of others wading in with their views. It all died a death as quickly as it arose. The sting in the tail was that of course certain MPs have claimed reimbursement of expenses without receipts.
The above isn’t the only recent situation where the powers that be could have been careful of what they wished for.
In the international tax arena the UK Government has been championing the Base Erosion and Profit Shifting project (BEPS). This seeks to provide consistency amongst countries as to the tax treatment of international profits and costs. Its aim is to prevent artificial diversion of profit into, typically, low tax jurisdictions. Broadly it does so by seeking to correlate the profits received by a country with the commercial effort that country puts towards generating them. Although this is a worthwhile project, it had the knock on effect that the UK had to consider its own patent box regulations. Patent box is the legislation which provides a lower rate of corporation tax on certain profits. It is created in a way that acts as an incentive for research and development to be undertaken. It targets highly mobile capital and provides an incentive for that capital to be attracted to the UK. The logic being that the capital results in highly skilled employment in the UK and therefore creates jobs here. Patent box is not a concept unique to the UK as many of our European neighbours have similar legislation. Each countries’ implementation differs.
In the eyes of some of our competitors the difficulty that they had with the UK patent box was the relatively loose correlation between the tax breaks and work being done in the UK. Reverting back to BEPS it could be argued that the correlation was not sufficiently strong to meet the basis on which BEPS is based.
After discussions with other jurisdictions, notably Germany, the UK Government have confirmed that the existing regime will continue in its current form until 2016 and be abolished by 2021. Depending on the view you take this is either a U-turn or the normal life cycle of a tax incentive. The cynic would suggest the former.
For those undertaking R&D in the UK, the proposals are unlikely to change their ability to claim the patent box incentives. For those who undertake their research outside the UK, either under UK management or sub-contracting all work to third parties, they may find themselves at a disadvantage after 2016. The conclusion is therefore one needs to maximise claims under the current regime and consider the future structure of their research function once details of the changes are announced. Even though we have a Budget in the next few weeks we must be cognitive that an election is coming up and therefore it may well be that announcements of any variations do not occur until we have certainty of the composition of a future Government.