Multinational companies will get an effective corporation tax rate of 8% for their offshore financing operations under new rules designed to stem the flow of companies leaving the UK for tax reasons.
Tax advisers warned that, despite the changes, companies would continue to leave the UK for a better tax rate. Multinationals including Shire, a pharmaceuticals group, the advertising giant WPP and the building products group Wolseley have moved offshore to be outside the UK's rules.
The government outlined plans today to overhaul the tax treatment of multinationals' complex offshore operations. The rules restrict multinationals from moving assets offshore to avoid tax.
Companies typically like to put finance functions offshore to escape the UK's 28% corporation tax. Offshore financing subsidiaries can lend to the UK group, enabling the company to offset its interest on the debt against UK profits, thus escaping tax on the loan interest in the offshore subsidiary.
The Treasury said that in future, rather than ignoring the structure and deeming the offshore income to be UK income, it would treat only a third of it as UK income. When the UK corporate tax rate hits 24%, that would mean an effective rate of just 8%.
"Some people will think that's excellent, a perfectly acceptable tax rate for finance income," said Bill Dodwell, a corporation tax expert at Deloitte. "Others will say, 'We are currently paying 1% tax on financial income – why would we think it's great to move to an 8% rate?'."
The distinction will depend on each company's commitment to the UK, Dodwell said. Companies with mostly UK trading are likely to think that the benefits of being headquartered here make an 8% rate worthwhile. He suggested: "If you haven't got big activities here and have an international board then you are going to think, 'What's in this for me?' "
The rules also introduced changes to the system for intellectual property. Multinationals often put this offshore to ensure the income generated is taxed at a lower rate. The government will now look to assess how big a connection with the UK any offshore intellectual property has.
Tax advisers said these changes could be problematic. "For companies that have intellectual property offshore, there's not enough detail," said Anneli Collins of KPMG.
Companies will continue to be able to offset interest on their loans against taxable profits. The government made a firm commitment to keeping interest deductability, a move likely to please private equity firms who often raise a lot of debt to turn around companies they buy.
The government also proposed a special low tax rate for income generated from patents. The pharmaceutical giant GlaxosmithKline said that it would build its first new plant in the UK for 25 years on the back of that announcement and invest an extra £500m in its UK activities.