Speech by the Exchequer Secretary to the Treasury, David Gauke MP: a competitive UK tax system
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Exchequer Secretary to the Treasury.
Firstly I’d like to thank the British-American Business Council for inviting me to speak and for pulling this morning together. I was obviously delighted to be invited to this fantastic city, and also to this rather spectacular hotel.
I have the rather grand job title of Exchequer Secretary to Her Majesty’s Treasury. It is such a grand title that I decided to investigate its history. And I discovered that the title of Exchequer Secretary to the Treasury dates all the way back to the mid-1990s! In practise, the role means ‘Minister for Tax’. So you can see why I prefer the title, ‘Exchequer Secretary to the Treasury’.
Working with my boss, the Chancellor of the Exchequer, I have day-to-day responsibility for the core taxes such as corporation tax, or income tax, or VAT, as well as some of the more specialist taxes that I’ll discuss later. I am also the Minister responsible for Her Majesty’s Revenue and Customs – the organisation in charge of tax administration and collection within the UK.
And, in contrast to the US system, as a Member of Parliament, I am responsible for taking tax legislation through the House of Commons. That is not just an esoteric constitutional point. The reality is that our executive and our legislature are closely entwined. A British Government with a working Parliamentary majority can deliver the tax changes it wants. No deadlock between one part of the political system or another. No risk of a referendum. When the UK’s Chancellor of the Exchequer says corporation tax is going to be cut, it gets cut.
I understand that not every system works that way. So given my role, when I talk to you this morning about why the UK is a great place to invest, I won’t be talking about our open economy, or our access to capital markets, or our first class infrastructure. And I won’t be going into all the excellent lifestyle opportunities that the UK offers. Or our highly skilled, creative and dynamic workforce.
Instead, I want to make the case that the UK offers a competitive and well-regarded tax system. I’ll be talking about the changes my Government is making on corporation tax and income tax to encourage investment in the UK. And I’ll be talking about the changes we’re making on specific taxes to incentivise investment in the creative industries.
So to start, by way of background. When my party was elected to Government, in 2010, we carried out a thorough review of the corporate tax system; working closely with business to make our tax policies simpler, more transparent and better suited to a globalised trading world and modern business practice.
My Government has made these changes because we believe that the corporate tax system can and should be an asset for the UK. We want a corporate tax system that improves our business environment, that helps attract multinational companies – like many of the companies here today – and that helps to encourage investment. And I’d like to spend this morning talking in detail about some of the specific changes we’ve made to help create that competitive tax environment.
Starting with corporation tax, the UK Government set out a roadmap three years ago, with the aim of achieving a system with low levels of CT, low levels of distortion, and low levels of complexity. And we’ve made real progress in achieving that.
In the last two years we have reduced our main rate of corporation tax from 28 per cent to 23 per cent, which is already very competitive. In France, the rate stands at 33 per cent, and in Germany, the rate stands at 29 per cent. So we already offer a significantly lower rate than our main European competitors. But we’re going further. From April 2014 our rate will drop again to 21 per cent. And in April 2015, the Corporation Tax rate in the United Kingdom will fall to just 20 per cent, which is set to be the lowest business tax of any major economy in the world.
So our record demonstrates two important attributes. First, a recognition of the need to be competitive, especially in the context of corporation tax which is a particularly growth damaging tax. Second, we recognise the need for stability and predictability – setting out our plans in advance and then delivering on them.
Alongside the reduction in the rate of corporation tax, we have also introduced new Controlled Foreign Companies rules, which came into effect from January this year. The new rules modernise the UK tax system for business while protecting the country from the artificial diversion of UK profits. These reforms reflect modern, global business practices and significantly reduce the compliance burdens of business. Like other areas of the corporate tax system, the new rules adopt a more territorial approach, focussing on taxing the profits from UK activities.
The rules are proportionate. Where a CFC charge arises, it will only apply to the profits that have been artificially diverted from the UK rather than a CFC’s total profits. Since we embarked on these reforms the flow of businesses leaving the UK has been stemmed – indeed we have seen businesses returning to the UK or coming here for the first time, like WPP, Lancashire, AON, Rowan and Seadrill.
As well as making changes to taxation on businesses, we have also taken steps to reduce levels of individual income tax. We introduced changes to ensure that the first £10,000 pounds – approximately $15,000 dollars – of personal income are completely tax free.
And for those paying tax at the higher rate, we have reduced their contribution from 50p in the pound, to 45p in the pound. This was politically difficult but economically necessary. And demonstrates our commitment to ensuring that the UK is an attractive location for high-earning individuals.
Through these policies we are sending a very clear message to international companies and business entrepreneurs. That if you want to move to the UK and you want to invest in the UK. If – crucially – you want to employ people in the UK then this Government will welcome you with open arms.
Now I know there have been some concerns – particularly among US organisations – about Company Executives being pulled up in front of UK Parliamentary committees about their tax arrangements. Of course, there are significant differences between Parliamentary Committees in the UK, and Senate and House Committees in the US.
US committees play an integral role in the drafting of legislation, while in the UK, permanent committees have no formal legislative role but rather write reports on issues that are topical and of public interest.
But there is a debate in the UK – as elsewhere - about how and where multinationals pay tax. The UK is not a tax haven; tax liability is determined by what the law says and not on the basis of specific deals. But nor, for the matter, by what a group of politicians thinks is the ‘fair amount’.
There is a case for updating the international rules that apply to multinational businesses, reflecting the realities of the internet age and the way large businesses now operate. But it is worth pointing out that, since the controversy about large corporations and tax broke last year, we have twice announced further cuts in corporation tax. Cuts that have been widely welcomed by both the public and Parliament.
I want to be clear what, as a Government, our expectations are of businesses. We expect businesses to pay tax in accordance with the letter of the law. But we do not expect businesses to pay no or very little tax altogether. We are also determined to deal with aggressive, artificial avoidance behaviour.
Now I have already touched on tax administration. As I mentioned, we are not a jurisdiction that offers ‘preferential special deals’. We are very competitive but it is on the basis of all taxpayers being equal under the law. I believe that also gives us a stronger reputation for respectability than some of our competitors. It is also important, however, that our tax administrators understand major taxpayers.
So – for example – the largest two thousand corporations in the UK have their own dedicated relationship managers at Her Majesty’s Revenue and Customs. These relationship managers support those organisations and help to ensure that their arrangements are compliant with UK law, and that they are paying the correct amount of tax. After all, it’s in everyone’s interests to have a strong working relationship that will ensure revenues are paid fully and that any disputes or queries can be played out quickly without expensive litigation.
The UK Government believes in a low corporation tax rate. We believe in a simple system that taxes profits in the UK. And we believe in good working relationships between companies and tax officials.
But I’d like to spend the rest of my time with you this morning highlighting some of the more targeted tax arrangements we are putting in place to encourage high tech industries, and to encourage creative industries to UK shores.
To me – alongside America – the UK seems like a natural home for creative organisations. If you look at, for example, three of the biggest film franchises of recent times – The Lord of the Rings, Harry Potter and James Bond – they all began their lives with the pens of British writers. And if you look at recent Oscar winners – like The King’s Speech and Slumdog Millionaire¬ – or recent Grammy Winners – like Adele and Mumford and Sons – or recent Tony Winners – like War Horse and Jerusalem – they all came from the visions of British playwrights or songsmiths or directors.
So we want to make sure that the right tax arrangements are in place for your companies to use the creativity and the ingenuity of British workers. And we also want you to feel that Britain is a place where your ideas and your intellectual property will be protected heavily but taxed lightly.
The UK offers a film tax relief, which has proven to be a real success. Not only does it cover up to 20 per cent of the costs of making a film, it is – as I’m sure many in this room will be aware – a very simple scheme to use. Since its introduction in 2007, the relief has supported £5.5 billion of investment into 825 British films, receiving roughly £800 million in relief. And, owing much to this relief, films produced in the UK – led by Inception and The King’s Speech – had a 14 per cent share of the global box office in 2010. That share increased to 17 per cent in 2011. And while I haven’t seen the final percentage figures for 2012, I know that 320 films received around £215 million of support in the year to March, and I know that those films included Skyfall, which was the second highest grossing film of last year. So I’m sure we’ll see those figures continue to rise.
Having seen the fillip this relief has given the film industry, the UK Government has decided to replicate it with other creative industries. So we announced last year that the Government will introduce corporation tax reliefs for the video games, animation and high-end television industries.
Having consulted each of those industries, including discussions with both small and large production companies, we have now announced the details of those schemes. There are pamphlets available today that lay out those details, but in brief, each relief will provide payable tax credits worth up to 25 per cent of qualifying production expenditure and will be modelled on our film tax relief system.
The animation and high-end television reliefs are being legislated and will apply from April this year, and the video game relief will follow shortly, as soon as we receive state-aid clearance from the European Commission.
To qualify for this relief, all productions will need to be certified as culturally British. Now I don’t want that to sound daunting. As those who’ve used the film scheme will be able to tell you, this isn’t about completely recalibrating or redesigning your brands. Nor is it about completely rewriting your characters.
So – for example – Sterling Cooper Draper Price wouldn’t need to move from Madison Avenue to London’s West End. But we might like it if Don Draper came to London for the odd conference. Or if the next time he cheated on his wife, he chose to do so with a nice Scottish girl. I am not sure we are offering tax incentives for that. But I’m sure the British Film Commission, which has an office on Wilshire Boulevard here in LA, will be happy to talk through the specifics of these reliefs in greater detail.
It isn’t just in those specific industries that we want to encourage creativity on UK shores. We’ve also introduced a competitive and comprehensive regime to support the development and exploitation of intellectual property in the UK. And with the short period of time I have left, I’d like to talk through our recent changes in the R&D credit regime, and the introduction of our UK patent box.
Starting with the latter, a new 10 per cent corporation tax rate has been introduced this year that applies to profits from patents and similar forms of IP. Now this 10 per cent rate – less than half the ordinary rate of Corporation Tax in the UK – will provide a real opportunity for businesses to reduce the costs associated with the commercial exploitation of IP.
The relief applies to worldwide profits from inventions patented by the UK Intellectual Property Office, the European Patent Office and certain other patent offices, and the range of qualifying income is broad. It is not only royalties and income from the sale of patents that qualify for this regime; but profits from the sales of products that incorporate a patented innovation are also eligible.
And on top of this very generous rate we are also increasing the support provided through our R&D credit system. There are different R&D regimes tailored to large companies and small- and medium-sized enterprises, both of which aim to encourage companies to undertake their R&D activity in the UK. Large company R&D relief currently works by way of a ‘super-deduction,’ allowing companies to reduce their profits liable to corporation tax by 130 percent of qualifying R&D expenditure.
This regime has recently been enhanced by the introduction, from 2013, of a 10 percent ‘above the line’ – or ATL – credit, which represents a new mechanism by which large companies can claim R&D relief. The ATL credit – which will fully replace the ‘super-deduction’ from 2016 – will now be payable to companies with no corporation tax liability. It will also be accounted for ‘above the tax line’ where it will be more visible to those making investment decisions and more beneficial to foreign-parented multinationals investing in R&D in the UK.
Our SME scheme for smaller businesses will continue to work by ‘super-deduction’ and allow eligible companies to reduce their profits liable to corporation tax by 225 percent of qualifying R&D expenditure, with loss makers benefiting from a cash credit of 11%. Meaning that overall, the R&D tax credit schemes allow large companies to reduce qualifying R&D costs by around eight percent, with significantly higher benefits for SMEs.
Put these measure alongside the patent box, the corporate tax reform, and the new reliefs and you will – I hope – have a very clear message that my government wants creative and innovative industries to flourish in the UK. And I hope it also sends a clear message that we are putting in place the tax measures we can to help that happen.
So if I want you to take away one message this morning, it is that we want you in the UK. I’m not suggesting that you pack up all your operations here in California and head across the pond. But what I would say, is that the UK has an awful lot to offer. For your projects, for your products, for your offices.
And as well as our brilliant universities and our top sports leagues and our open economy and our access to markets, the UK can offer you another very important incentive. Competitive taxes. We understand that every business wants to turn a profit, and every business wants to pass those profits on to its workers and its shareholders. And in the UK, we’re making sure that low taxes will help you create the best possible products, and help you return the biggest possible profits.
We want all businesses to thrive in our country, and if your business is interested in doing that then we’ll be happy to have you. So thank you all for welcoming me to California. Thank you for listening to me this morning.
And I will welcome you all – in turn – to the UK. You’re more than welcome to bring your companies with you!