PBR 09: Royalty tax cut doesn't go far enough

Chancellor Alistair Darling has announced a reduction in the corporation tax on royalty income from 28% to 10%.

The move could potentially save pharmaceutical giants such as GlaxoSmithKline "billions of pounds", according to Kevin Hindley, a managing director at international tax advisers A&M Taxand.

The "patent box" changes announced in the PBR 09 will enable royalty payments made to companies for their intellectual property to pay the lower rate from 2013. The move provides a "huge incentive" for companies to stay in the UK rather than move its operations overseas, said Hindley.

In the pre-Budget report papers it is predicted the move will cost the government £1.3bn in lost revenue. However, Hindley predicts the reduced rate would boost UK business.

The Treasury's estimate is based on royalty income of £7.2bn in 2013. Yet many companies might change their plans to move to more favourable tax regimes due to the new rate, Hindley believes. "They could also attract companies to register their intellectual property in the UK and in that sense it could be a lot less costly [to the Treasury]," said Hindley.

The move is competitive, as it sits between the rates in Luxembourg set at 6% and Ireland at 12%.

However, other advisers bemoaned the delay in implementing the new rate.

Sue Bonney, head of tax for KPMG Europe, said: "It's a positive move but you could get that kind of relief in the Netherlands tomorrow."

She added that although the move was a step in the right direction, it needed to be made much "quicker" to help the UK's competitiveness.

IN OUR VIEW

This could give the UK a competitive edge – but why not straight away? Will companies hang around or move to, for example, Luxembourg where the rate is much lower. The Netherlands also allows many types of royalty payments to be taxed at 6%. The UK government needs to instigate this move quicker – and with a broader brush – to show it’s really IP-friendly.