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KPMG Treasury secondee behind UK patent box hits back at PAC criticisms

03 May 2013

Salman Shaheen

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When KPMG’s Jonathan Bridges finished a Treasury secondment to help design the patent box, he thought he would resume life as a corporate tax adviser at the Big 4 firm without much fanfare. He did not expect to be outed as the prime example of what some UK MPs believe is a rotten system that allows secondees to return to their firms and advise clients to get around legislation they created. But Bridges, singled out for criticism by Parliament’s Public Accounts Committee (PAC), denies he sought out loopholes for clients to exploit.

The committee, chaired by Margaret Hodge, sharply criticised a system that allows individuals from the Big 4 accountancy firms to be seconded to the Treasury to advise on drawing up tax legislation and then return to their firms to advise clients on how to get circumvent it.

The PAC report released last week highlights the brochure Patent Box: what’s in it for you, written by Bridges, who worked on the patent box legislation at the Treasury for 15 months up until Spring 2010, as evidence that KPMG views the legislation as a business opportunity to reduce UK tax and that the firm can help clients in the "preparation of defendable expense allocation".

"KPMG denied that it was advising its clients on how to use those laws in ways that Parliament did not intend, but we are not convinced by its insistence that all the advice it offers to clients seeks to fulfil the purpose of the legislation," the report states.

Bridges, however, says the criticism is misplaced.

"To suggest that my intention and by inference that of other secondees in similar positions is to seek out loopholes and then exploit them to the benefit of our clients is just plain wrong," Bridges told International Tax Review. "Indeed our role is to advise on how to implement tax policy in line with the intention of Parliament avoiding anomalies that could be open to abuse."

"Having spent some considerable time now being closely involved in the development of the patent box rules, it makes sense that I’m talking to taxpayers about using the regime and the benefits it can deliver," he added. "It’s good for taxpayers in that I can share my experience and it’s good for government and the UK if taxpayers go on to use the regime and are encouraged to invest in the UK economy."

Bridges points out that past and present ministers have taken the view that making the UK tax system more competitive will promote investment and job creation. He believes the introduction of the patent box regime, which offers a low effective rate of tax (10%) on profits derived from patents, is one example of recent reforms aimed at making the UK tax system more competitive.

"I lead KPMG’s team advising clients on whether and how to make use of the patent box regime," Bridges said. "Yes this does entail explaining to clients that if they use this regime they can reduce their UK tax burden, but fundamentally I am promoting the UK and encouraging clients – both those in the UK and considering whether to invest here or overseas and also those considering coming to the UK – to own, develop and exploit their intellectual property from the UK."

Bridges says that HM Revenue & Customs (HMRC) and a number of other government bodies are actively promoting the regime much as he has been doing, running events explaining and encouraging the use of the patent box and producing their own marketing literature to supplement the technical notes and guidance HMRC routinely produces.

"If I understand it correctly, there seems to be a concern that KPMG and I have been advising clients on how to make use of the patent box in a way which was not intended by parliament," Bridges said. "This is absolutely not true and to do so would in fact be in breach of the principles we apply in governing our tax work."

One ambiguous paragraph in KPMG’s brochure that could have piqued the PAC’s curiosity reads: "Action should be taken by companies now to understand how to benefit from the regime and what business change might be advantageous prior to the rules coming into effect. For example, many groups currently hold valuable patents used in business processes which do not attract revenue streams. There are a number of ways to deal with this to secure patent box benefits."

Bridges explains that this comment refers to the fact that though the rules are well written in most respects, they are very complex.

"The reason why our briefing material refers to potential business changes and process patents is because the rules are specifically designed to reward valuable process patents," he says. "However, to date, some companies may have chosen not to specifically charge for the use of these. With the introduction of patent box we would recommend reconsidering this. Equally, where the owner of patented process technology is itself using the technology to produce products which are not patented, the rules provide for a notional royalty amount to be attributed to the process. This amount then flows in to the patent box."

"What we are absolutely not suggesting is that a patent box benefit is available in the absence of revenues or associated profits traceable back to patented technology," Bridges adds.

Credibility of government departments

Richard Murphy, director of Tax Research, suggests the PAC may have made too much of the specific link between Bridges and the patent box, but he says the PAC’s general point about the influence of firms on policy making is correct.

Murphy, who worked closely with HMRC when he was serving on the interim general anti-abuse rule (GAAR) advisory panel, said he was surprised to find how many people who were supposed to be from the Revenue side were actually seconded from the Big 4 and law firms.

"Lots of work was delegated to them," Murphy said. "The use of secondees is much more prevalent than in the past."

"HMRC’s chairman is ex-KPMG," he added. "Coupled with a clear dependence on secondees, we have an apparent structure where the Big 4 are running large parts of policy making."

Murphy believes this is a serious problem, undermining the independence and integrity of HMRC and leaving it biased towards business.

"People will not believe it is a credible authority," he said. "The patent box is a lousy piece of legislation. If this was thought up by KPMG in the first place, then it shows the corporate capture of the Treasury and HMRC is far advanced."

International Correspondents