George Osborne waters down flagship controversial tax break
Patent boxes allow firms to pay much lower taxes on profits from patented inventions, but critics say it gives UK too much of a fiscal advantage
George Osborne’s move removes one of the potential flash points between the UK and Germany before this week’s G20 summit in Brisbane. Photograph: Pa
George Osborne has watered down one of his flagship policies following a long-running dispute with Germany over a controversial UK tax break.
The chancellor’s move on so-called patent boxes – which allowed companies to pay much lower taxes on profits from patented inventions – removes one of the potential flash points between the UK and Germany before this week’s G20 summit in Brisbane.
The incentives were introduced last year to encourage hi-tech businesses to commercialise their intellectual property in the UK by charging just 10% tax on the resulting income. But Germany led numerous countries in arguing that the regime encouraged artificial shifting of profits to avoid tax elsewhere.
Osborne described the new agreement as “a great deal for Britain” that protected the UK’s vital scientific research while making sure there were international rules that stop aggressive tax avoidance. It would involve the UK winding down its patent box rebates and joining other OECD countries in only granting tax breaks for patents directly tied to research and innovation at home.
Germany’s finance minister, Wolfgang Schäuble, said: “We have reached an important agreement on patent boxes. Preferential tax treatment of intellectual property must be dependent on substantial economic activity. More and more countries are speaking out against allowing too much leeway for large multinationals to minimise their taxes. Just because something is legal, does not mean it is fair in tax terms. Multinationals must contribute their fair share to public budgets – just like any other company has to.”
The Treasury denied it had performed a U-turn on the issue, although it has previously defended its original policy. A year ago, it issued a statement to the Sunday Times, saying: “We are confident that the UK’s patent box regime does not breach the EU code of conduct group’s criteria [in which member states pledged to roll back measures that constitute harmful tax competition and refrain from introducing them]; it is more tightly defined and imposes tougher eligibility criteria than other similar measures.”
Jonathan Riley, UK head of tax for accountants Grant Thornton, said: “We were aware from the time the patent box regime was announced that some of the UK’s competitor nations felt this gave the UK too much of a fiscal advantage. Now it would appear that the UK will have to water down its legislated tax reliefs.”
The Treasury countered that it had won important concessions including so-called “grandfathering”, which will allow intellectual property within existing regimes to retain tax benefits until June 2021.
