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TIGA: Encourage More Global Traders Via Tax Relief for Exporters

By November 5, 2014 No Comments

TIGA, the network for videogame developers and digital publishers said today that the UK Government should introduce an Export Tax Relief for UK companies that sell abroad, in order to drive export led growth. An Export Tax Relief would encourage more firms to export because eligible UK companies would pay a competitive tax rate (e.g. 15 or 10 per cent) on the profits generated from their exports.

The Challenge

The UK needs to rebalance its economy towards exports and investment. Unfortunately for the UK, trade continues to disappoint.

  • According to the House of Commons Public Accounts Committee, from 2000 to 2012, the annual value of UK exports nearly doubled, but during the same period, the annual value of exports globally nearly trebled.
  • Additionally, the annual value of UK global exports has been flat for the last two years (1). 
  • The UK has a slightly lower share of exporting SMEs than the EU average and the share of UK SME’s revenues generated via exports is also lower than the EU average (2). One in five UK SMEs export compared to an EU average of one in four (3). 
  • Public support for exporters needs to help both SMEs and large businesses. Only £70 million – 2 per cent – of total government support for exporters (provided by UKEF) went to SMEs in 2012. In Germany, 46 per cent (provided by Euler Hermes)went to the Mittelstand, or medium-sized businesses, according to the British Exporters Association (4).
  • Exporting has great potential for UK businesses, but access to finance is relatively difficult, especially for creative businesses. Also, the cost of exporting in terms of increasing production, paying for insurance against late payment, and researching new markets can be a barrier to exporting.
  • If the Chancellor’s target of the UK achieving £1 trillion annual exports by 2020 (i.e. doubling the current figure), more needs to be done to encourage and assist exporters.

Propelling Export Led Growth

Introducing an Export Tax Relief for UK exporting companies would help a range of businesses across many sectors, including many game development studios. 95 per cent of UK games development studios export at least some of their games. The UK Government should consider introducing an ‘Export Tax Relief’ with a competitive tax rate (e.g. 15 or 10 per cent) on the profits generated from their exports. This could be achieved by applying an additional deduction to taxable profits, in the same manner as the existing Patent Box scheme to ensure commonality within the tax system. This method of tax relief would benefit from the fact that revenues from exports are easily identifiable, giving companies the option of identifying relevant export profits via apportionment or ‘streaming’ methods (depending on whether the export costs are easily separable), in a similar manner to that set out in the Patent Box legislation.

Once relevant export profits are identified, a simple formula can be applied to generate the correct deduction from the overall taxable profit figure to reflect an equivalent tax rate of 15 or 10 per cent on export profits (as is done with the Patent Box computation). If a company is losing money on exports, the identified “export losses” can be carried forward for use against the next available export profits of the trade (again – as per the Patent Box structure) (5). 

Key conditions should be that:

  • The company has undertaken qualifying exports (see below) for goods and/or services actually produced in the UK.
  • Relevant export income and profits from exports will need to be prescribed in detail as with the patent box system.
  • The interaction with other reliefs will need to be considered, including Videogame Tax Relief, R&D tax credits, and the Patent Box itself. In general, there should be no double-dipping (i.e. claims for more than one relief on the same income or costs).

It would be prudent for HM Treasury to initially limit the Export Tax Relief to SMEs or even to just small businesses. This is because it is difficult to estimate the profits and thereby the initial reduction in Treasury tax revenues generated from exports (although over time the lower rate of corporation tax on exports should encourage more exports and therefore greater tax revenues to the Treasury).

Dr Richard Wilson, CEO, TIGA, said:

“The UK has a persistent current account deficit, exporting fewer goods and services than it imports. If the UK is to achieve export led growth in the future then we need to assist and encourage more firms to export. Currently, just one in five UK SMEs export compared to an EU average of one in four. If the UK introduced an Export Tax Relief for SMEs, whereby eligible UK companies would pay a competitive tax rate on the profits generated from exports, then more businesses would have an incentive to export. This in turn could drive export led growth and help to rebalance the UK economy.

“Ultimately, companies need to be competitive and to provide superior products and services. Yet the UK Government can encourage more businesses to export through the tax system. The UK may not be the workshop of the world any more but we can encourage more global traders.”

Peter Denison-Pender, Director of Tax for MMP Tax Ltd, said:

“We support these imaginative proposals. Any mechanisms that create positive incentives for companies to focus more on activities that will encourage growth and prosperity must be given serious consideration. We urge the Treasury to explore the ramifications of these proposals, including ways to assess the cost/benefit position, their impact on the Controlled Foreign Company rules, and their impact in the context of the UK’s participation in regional and world trade agreements such as the EU and GATT.”

Martin Lambert, Corporate tax partner for Grant Thornton, said:

“UK businesses need to increase their exports. And for those who do export, they need to rely less on the EU and capitalise on the emerging BRIC (Brazil, Russia, India and China) and MINT (Mexico, Indonesia, Nigeria, and Turkey) economies. We support the introduction of a specific relief to encourage UK businesses to take advantage of these opportunities, and would also support the introduction of additional practical support for mid-sized businesses, alongside new regulations. An export tax relief together with mentoring of businesses looking to export into new markets would incentivise UK businesses to expand in this way.”

Richard Heap, Technology & Media Partner at Kingston Smith LLP, said:

“With a thriving UK technology industry, and London being recognised as the global hub of the creative industries, we strongly support a tax driven initiative to increase exporting by SMEs. At Kingston Smith, we have first hand experience of SMEs driving the growth in the technology and creative sectors, with an increasing number of those companies expanding overseas. The biggest challenge they have is cost in doing so, so any support they can get, the better.”  

Steve Cartwright, Head of Creative & Interactive Media, Henderson Loggie Chartered Accountants, added:

“Within the SME business community there is enormous potential for businesses to achieve growth through exports, whether to traditional export destinations or to the many emerging economies. One of the main reasons why businesses shy away from exporting is the upfront investment and costs required to establish themselves in export markets. Whilst many forms of assistance are available to SMEs to support them, a real tax benefit such as Export Tax Relief could make all the difference in strategic decision-making. International trade is the bedrock to cement the UK’s position as a global leader in the games and wider creative industries and we thoroughly support the introduction of an Export Tax relief.”

Jeffrey Meek, Partner and Head of Forensic Accounting, French Duncan Chartered Accountants, said:

“Export Tax Relief will incentivise more small firms to export their goods and services. This is an intelligent, innovative and inspired proposal which is good for firms, good for industries and good for the UK.”

 

-ends-

 

Notes to editors:

  1. http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/709/70902.htm 2. The Government does spend resources on promoting exports. For example, the PAC notes that In 2012-13, UKTI and FCO spent £420 million to promote exports.   3. Business, Innovation and Skills, Trade and Investment for Growth White Paper (February 2011), Cm 8015. Roads to Success: SME Exports, House of Lords Select Committee Report on Small and Medium Sized Enterprises, Report of the Session 2012 – 13 (March 2013), HL Paper 131, paragraph 2.7. 4. See http://www.ft.com/cms/s/0/cd4f0c40-ab6f-11e3-8cae-00144feab7de.html?siteedition=uk 5. Tax relief can be delivered in a number of different ways, and each has its benefits and issues – for instance:
  2. Additional deduction (e.g. R&D tax relief, Patent Box): An additional deduction is made from taxable profits, resulting in less tax being paid. This is straightforward to administer and would not include cash credits from the Government, but has little benefit for loss making companies unless there is an additional opportunity to surrender losses for a payable credit (such as for loss-making SMEs for R&D Tax Relief, or under the new RDEC scheme).
  3. Payable credit (e.g. new large company RDEC scheme): A credit paid directly to companies by HMRC, which can be used to discharge tax liabilities, or (if none exist) claimed as cash. This approach has the advantage of being easy to calculate and explain to companies because the benefit is very clear. This does have the potential to require more cash outflow from the Treasury, however, and the payable credit is taxable which adds some complication to the calculation.
  4. Allowance (e.g. Annual exemption for capital gains tax (which is available for individuals)): A company could pay no tax on Export Profits up to a certain value, and full CT thereafter. This might encourage non-exporting companies to begin to make export sales, but would do less to encourage significant exporters to increase their activity (though it would reduce their total tax bill, ‘rewarding’ them for their substantial exports), although this could be an expensive option.
  5. Exemption (e.g. United States IC-DISC scheme): A separate subsidiary is set up to make exports, and pays no corporation tax. This is probably somewhat complex and a big change to the UK tax system. Accordingly, this is not the most attractive option.

Background information on Export Tax Relief

There are three distinctive groups in the exporting process.

  • a) Direct: where an exporter operates directly from the UK with its overseas customer. Export orders are taken in the UK; manufacture and supply of goods are organised from the UK; billing and revenues are managed direct from the UK.  Export profits are taxed in the UK.
  • b) Branches: where an exporter retains a UK base and establishes an overseas branch office, funded directly by the UK. The overseas branch is a separate legal entity in the host country and is directly linked to the UK. Billing is done from the UK, all revenues go direct to the UK, the branch office is essentially a cost centre, and all costs/revenues are brought directly back into the UK. Export profits are taxed in the UK, however relief is usually given for foreign taxes suffered to prevent double taxation.
  • c) Subsidiary: where an exporter establishes a permanent and separate legal entity overseas. All billing and revenues are managed in the overseas entity. Profits are taxed overseas, and brought back into the UK via dividend distributions.  These can be subject to withholding tax at source, depending on the nature of any double tax treaties in place between the two countries.

Firms that are direct exporters (a) and firms with overseas branches (b) should be eligible for the Export Box/Export Tax Relief. In both cases the export business is undertaken directly from the UK. Subsidiaries (c) should not benefit from the Export Tax Relief. Similarly, indirect exporting firms (i.e., companies that contribute to the supply chain of another company that directly exports) should not be eligible for the Export Box/Export Tax Relief.

 

About TIGA  

TIGA is the trade association representing the UK video game industry.

We help developers and digital publishers build successful studios, network with the right people, save money and access professional business advice. We also have traditional publishers, outsourcing companies, technology businesses and universities amongst our membership.

TIGA is 90% funded by independent UK businesses. 80% of our board members are developers and/or from UK owned businesses, and 50% of our board are UK business owners themselves. Since 2010, TIGA has won 17 business awards.

TIGA focuses on three sets of activities:

  • Political representation
  • Media representation
  • Business services

This enhances the competitiveness of our members by providing benefits that make a material difference to their businesses, including a reduction in costs and improved commercial opportunities.

It also means our members’ voices are heard in the corridors of power and positively represented in national, broadcast and UK video game trade media.  

Get in touch:  

Tel: 0845 468 2330

 For further information, you can also contact:  

 

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