Relief on Investments: Seed Enterprise Investment Scheme

The Government has announced a new scheme for relief on investments in start-up companies to be called Seed Enterprise Investment Scheme (SEIS), and it will be available from 6 April 2012. It will run alongside the existing Enterprise Investment scheme (EIS) but will be targeted at start-up companies.

The main features of the new scheme are as follows:

·         Income tax relief of 50% of the investment will be available to individuals who invest in qualifying companies, irrespective of their marginal rate of tax;

·         An annual investment limit of £100,000 per individual will apply;

·         A cumulative investment limit of £150,000 per company will apply;

·         Gains arising on the disposal of other assets in 2012/13 will attract a capital gains tax exemption if they are reinvested through the SEIS in the same year.

The enhanced rate of relief reflects the inherently risky nature of small start-up companies

In addition to announcing the new scheme, the Government has confirmed that simplifications will be made to the existing rules for Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

For further information or advice on this topic please contact Ward Williams.

www.wardwilliams.co.uk

Amendments to R&D Claims

The Finance Bill includes the increase in the rate of R&D relief for SMEs to 225% with effect from 1 April 2012, now that State Aid approval has been granted.  This increased rate of relief also applies to pre-trading expenditure.  In order to pay for this increase, vaccine research relief is being withdrawn for SMEs, and the payable credit is also being reduced to 11%. 

A benefit for start-ups is that the restriction in the amount of the R&D relief to a company’s PAYE/NIC liability will be removed for accounting periods ending on or after 1 April 2012. R&D relief is subject to the requirement that the claimant is a going concern. 

The requirement for minimum expenditure of £10,000 a year will be removed for accounting periods ending on or after 1 April 2012.

There is also a change to the definition of ‘externally provided worker’, so that the requirements to be met in order to include the costs of temporary workers in a claim will be relaxed from 1 April 2012. The requirement will now be that the individual must provide their services to the claimant company under the terms of a contract between themselves and another person (not the claimant company).  The relevance for SMEs is that they can often lack the specialised R&D staff they need, and bring them in on a temporary basis through a temporary agency.

Included in the Autumn Statement was the announcement that an ‘above the line’ tax credit would be released for consultation in the 2012 Budget and legislation will be included in Finance Bill 2013.

For further information or advice on this topic please contact Ward Williams.

www.wardwilliams.co.uk

Patent Box

The Government is introducing a Patent Box from 1 April 2013, which will apply a reduced 10 per cent rate of corporation tax on profits attributed to patents.

The Government aim is that the Patent Box will create a competitive tax environment for companies to develop and exploit patents and other similar intellectual property (IP) in the UK. The Patent Box will provide an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products. This will encourage companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK and maintain the UK's position as a world leader in patented technologies.

The Key points are:

·         UK businesses will be able to benefit regardless of how they use their patents - whether they are licensed, included in patented products, or used in internal processes or to provide services.

·         Worldwide income from existing as well as new IP will be included. To enable this, the full benefits of the Patent Box will be phased in over five years from 1 April 2013 i.e. 60% of the Patent Box benefit will be available in 2013/14 increasing to 100% by 2017/18.

·         In many cases the profit attributed to patents is calculated from total profits using a step-by-step method. This structured approach will increase certainty for businesses using the regime and reduce administrative burdens compared to requiring businesses to value each patent individually.

·         Smaller claims can benefit from a simplified calculation.

·         In response to business' comments on the June 2011 consultation, the Government has made a number of technical changes.

Overview of the Patent Box regime

The Patent Box is expected to benefit a large number of UK companies in a wide range of sectors. Businesses will be able to benefit regardless of how they use their IP - whether it is licensed to others, included in products they sell, or used in internal processes or to provide services. Worldwide profits from qualifying IP will be eligible for the reduced 10 per cent tax rate.

Qualifying IP includes patents granted by the UK Intellectual Property Office and the European Patent Office, as well as supplementary protection certificates, regulatory data protection and plant variety rights. It will also include patents granted by other EU Member States that have comparable patentability criteria and search and examination practices to the UK. The Patent Box will apply to existing as well as new IP, and to acquired IP provided that the group has further developed the IP or the product which incorporates it.

In many cases companies will be able to benefit where they themselves have rights to the IP owned by others. A UK Patent Box company could, for example, own European rights to exploit a patent while the rights to other territories are held by other companies. Alternatively a UK Patent Box company may have rights to IP developed in collaboration with another company or a university.

Qualifying income includes:

·         sales income from patent protected products, including spare parts;

·         license fee or royalty income from licensing of patent rights;

·         patent right sale proceeds; and

·         patent right damages for infringement.

In calculating those profits to which the 10% rate will apply a three stage mechanical process has been identified involving:

Stage 1: Identification of relevant intellectual property (IP) income and profits;
Stage 2: Deduction of routine profit; and
Stage 3: Deduction of any IP profits relating to marketing intangibles.

Claimants will now have the option of performing a bespoke marketing intangibles valuation in order to arrive at a notional royalty amount to be extracted from residual IP profits giving the final patent profit figure to be taxed at 10%.

Companies which use their IP to perform processes or provide services will benefit from the Patent Box up to the level of an arm's length royalty for the use of the qualifying IP. The patent box regime will be phased in from 1 April 2013. This is a significant opportunity and there is time in 2012 to ensure that your company is best placed to use the scheme to its full benefit. A targeted anti-avoidance rule (TAAR) will apply and comprehensive guidance will be published in summer 2012.

For further information or advice on this topic please contact Ward Williams: http://www.wardwilliams.co.uk/

An update on what we already know: Personal and Corporate taxes

Personal taxes

The rates of income tax applying for the year 2012/13 will be unchanged so that the basic rate of income tax is 20%, the higher rate is 40% and the additional rate is 50%.

From 6 April 2012 the Finance Bill includes:

·        An increase to the personal allowance by £630 to £8,105 for those under 65; and

·        A reduction to the basic rate limit by £630 to £34,370.

However the starting point for paying income tax at the 40% rate remains unchanged from 2011/12 to 2012/13.

The capital gains tax exempt amount is frozen at the 2011/12 level of £10,600. In future the CPI will be used as the default indexation assumption for the capital gains tax annual exempt amount.

The inheritance tax allowance nil rate band has been frozen at £325,000 until April 2015. From 6 April 2015 the CPI year on year increase will be used as the default indexation assumption for the nil rate band.

The rates of national insurance (NIC) are due to be released with the 2012 Budget.

Corporate taxes

As previously announced a further 1% reduction in the main rate to 24% for the Financial Year commencing 1 April 2013 has been included in the draft legislation for Finance Bill 2012. The main small profits rate remains at 20%.

For further information/advice on this topic please visit www.wardwilliams.co.uk

R&D Tax Relief for Production

A question can arise as to whether production can be treated as part of continuing research and development (R&D) rather than just the making of a product to meet an order. The HMRC position has been that production could never be treated as R&D if the product was actually sold to a customer. HMRC has now issued draft guidance on production which can benefit from R&D tax credits.

The reality for many businesses is that the R&D activity will continue after a company commences the process of making goods or services that are supplied to a customer.

The start point is the underlying principle that any activity must seek to achieve an advance in science or technology and that “activities which directly contribute to the advance, by resolving science or technological uncertainty, are R&D”.

 Where a product is created as part your R&D activity it is important to show the degree to which its creation contributed to an advance by resolving scientific or technological uncertainty, rather than simply whether it was created with a view to supply to customers.

The draft guidance is available at www.hmrc.gov.uk/consultations/production-guidance.pdf

For further information/advice on this topic please contact enquiries@wardwilliams.co.uk or visit www.wardwilliams.co.uk

Subsistence payments for employees travelling abroad

HMRC has published an updated list of worldwide subsistence rates for expenses payments that can be made to employees travelling abroad, without deduction of tax.

The list provides benchmark rates when paying accommodation and subsistence expenses; for example for lunch in Rome. These amounts can be paid without the requirement for the employee to produce receipts and do not have to be recorded on forms P11D.

Note that these tax free rates are in addition to the incidental overnight expenses of up to £10 that can be paid to employees who are abroad overnight.

The above is to simplify administration for employers but they will need to ensure that they have their own systems in place to manage and control this type of expenditure.

For further information/advice on this topic please visit www.wardwilliams.co.uk

HMRC Business records checks scheme expanded

HMRC have extended their controversial programme of checking the business records of small and medium-sized enterprises (SMEs).

Initially, HMRC will levy a penalty only in the most extreme cases of poor record-keeping. The department intend to issue penalties of up to £3,000 for serious inadequacies in the longer-term.

Up to 12,000 checks will be completed by the end of the current financial year; 20,000 are provisionally planned for 2012/13.

Please do not hesitate to contact our Business Services Department if you have any concerns about this HMRC initiative or require a comprehensive review of your business records.

For further information/advice on this topic please visit http://www.wardwilliams.co.uk/

SME Finance - Don't ask and you don't get

According to the recently released SME Finance Monitor, only two thirds of small firms (those with fewer than 10 employees) are getting the finance they need, leaving a third being turned down when they apply for loans.

However, the news for small firms is worse than this statistic suggests, as half surveyed said they wouldn’t even apply for a loan in the first place.  Well why? This is because they believe they will simply be turned down in any case.

Old style branch banking has disappeared and this has not helped together with a widespread distrust of the larger banking institutions.

How do these firms survive meanwhile? Are they relying on other sources of finance, including factoring and leasing? – plus extended payment terms too – of course they are.

The downside – watch out these SMEs may be using your credit line as a bank!

For further information/advice on this topic please visit www.wardwilliams.co.uk

HMRC and Mortgage Lenders Work Together

The new scheme to combat mortgage application fraud was launched on 1 September 2011. The mortgage verification scheme has been developed by HMRC, the Council of Mortgage Lenders and the Building Societies Association.

Mortgage lenders will only use the scheme where they suspect mortgage fraud, following their own checks. Where they have inadequate evidence of declared income and suspect fraud, mortgage lenders will send HMRC information from the mortgage application using a secure electronic platform. HMRC will cross check the income details declared to lenders against information provided in income tax and employment returns. It will then advise lenders whether or not the details match. Lenders will use this information in making their lending decisions.

Not surprisingly HMRC will use this information within their own risk assessment process to identify undeclared income. Any mortgage lender can use the scheme at a cost of £14+VAT per case.

Nobody should object to the principles of preventing both mortgage fraud and undeclared taxable income. However no doubt the system will be abused by both the mortgage lender and HMRC, the question will be how far this abuse goes. At minimal cost the mortgage lender has access to confidential information in respect of the taxpayer and HMRC has access to information in a format that was never intended to be submitted to HMRC. We all know how much of a hash both these organisations can make in interpreting legitimate information provided to them. Time will tell.

For further information/advice on this topic please visit www.wardwilliams.co.uk

Credit Risk Part 3 of 3: Internal Risk Data

In the current economic climate, managing a credit rating and obtaining finance is more important and difficult than ever. It is vital that companies are provided with the right information from the market and credit rating agencies, to ensure their credit and risk evaluation shows them in the best light.

Part 3 of 3 Internal risk data (part 1 managing risk information, part 2 external risk data)

Internal risk information usually falls into 3 categories: strategic, financial and operational. Users of company risk information will be looking for, and expecting to find information under these headings, so make it easy for them by proving the information in this way:

Strategic
Risk assessors will be looking to see that the company strategy is well thought out, researched, tested and revised inline with real world developments and expected future events.  With this in mind; provide a commentary on changes to previous strategy or expected future changes and the reasons for this, explain how risk factors are being monitored and managed.

Some of the basic points to cover are:

• Market position of key products
• Ability to differentiate from competitors; maintaining a competitive advantage
• Product life cycle and distribution patterns
• Sourcing of key materials/ skills
• Ownership of IP and copyright benefits
• Trade or pricing regulation and litigation risk, changes in legislation or regulation
• Reliance/dependence on specific customers, suppliers or markets
• Outline of your current strategy, approach to risk management and business continuity plans

Financial
Start with a brief outline of the management and legal structure, major shareholders and stakeholders and the business plan. There should be a clear link between the company strategy and the business plan, if not, this should be explained. If specific developments or risks have been identified, model their effects, applying various scenarios to demonstrate how the situation would be managed to ensure compliance with loan covenants or other limiting factors, always include cash flows in this analysis.

In terms of figures, financial forecasts and company accounts will cover most expected data but cash flow will be of most interest to a risk assessor, so explain the key drivers and ratios including gearing and trend analysis.  Strip out any unusual cash flows such as share buybacks or exceptional transactions, explaining what you have done and why. Discuss the balance sheet, commenting on liquidity and like cash flow, strip out or highlight any distorting transactions. It may also be relevant to comment on the following: Contingent liabilities, pensions, onerous contracts or large capital projects as well as commentary on current finance including possibility of renewals or additional draw downs.

Operational
This is all about management, who they are, their track record and approach to risk. How have management reacted to previous unexpected developments? Have the changes made by management had an impact? If there are developments that may be seen to affect the company, it is probably wise to contact any parties that may be concerned by the news, be it creditors, banks or investors. Proactively advising of changes and what actions are being taken will be met with less scepticism. If there are concerns about releasing commercially sensitive information it is possible to put confidentiality agreements in place.

For further information on this topic please visit www.wardwilliams.co.uk or email enquiries@wardwilliams.co.uk