Patent Box

The Government has now published (29 November 2010) its thinking on the taxation of innovation and intellectual property as part of its proposed Corporate Tax Reform.

The document acknowledges that there are currently no specific incentives for companies to retain IP in the UK during commercialisation. In contrast, several other jurisdictions provide incentives for companies to own and exploit IP, particularly patents, in addition to R&D incentives. As a result, the UK tax regime can be uncompetitive for companies to hold and exploit patents. This provides incentives for businesses to transfer patents offshore prior to the full realisation of their value, in order to benefit from more advantageous regimes elsewhere.

To encourage businesses to retain and exploit IP in the UK the proposal is the introduction of the Patent Box. The aim of the Patent Box is stated as rewarding successful technical innovation.

In summary the proposals are:

A 10% rate for profits arising from patents, to apply from 1 April 2013.

The regime to focus on patents rather than on other forms of IP. This is because it is believed that patents have a strong link to ongoing high-tech R&D and manufacturing activity which the Government sees as a priority to encourage in the UK. They are also clearly identifiable, and provide exclusive legally protected rights to exploit a novel product or process.

The 10% rate to apply to net patent income after associated expenses, including pre-commercialisation expenses, rather than to gross income.

All patents first commercialised after 29 November 2010 will qualify for inclusion in the Patent Box. More detailed qualification and transitional rules will be discussed during the consultation period.

Available to both royalty income and “embedded‟ income, that is included in the price of patented products.

To determine the proportion of income commercially related to patents (“embedded”), either the “arm’s length principle”, as set out in the Organisation of Economic Co-operation and Development (OECD)‟s Transfer Pricing Guidelines to be applied, but for the sake of simplicity the Government favour the adoption of a largely formulaic approach.

Potentially link the amount of income which can be attributed to the Patent Box to the level of ongoing R&D or associated manufacturing activity.

While the Patent Box will not apply until 1 April 2013 it does impact upon patents commercialised after 29 November 2010 so it is relevant to current operations and the management of your IP.

The Government has requested responses to the proposals by 22 February 2011. The full document can be found at:

 http://www.hmtreasury.gov.uk/d/corporate_tax_reform_part2b_innovation_and_intellectual_property.pdf

R&D Tax Credits - Don't miss this valuable benefit

The financial benefits of the R&D tax scheme can be substantial, particularly for companies involved in technology who are likely to undertake eligible work.  While many companies are using this scheme successfully, many others either do not realise that they have eligible projects or consider that it is not worth the effort because of a misconception of the process involved.

R&D Tax Credits were introduced for Small and Medium Enterprises (SMEs) in April 2000 and for large companies from April 2002.   Any type of company can claim the relief if incurring qualifying expenditure of at least £10,000 per annum on qualifying activities.

The credit represents an additional 75% tax deduction for qualifying expenditure by SMEs (30% for expenditure by large companies). In addition, should an SME be loss-making it can surrender its enhanced deduction for a repayment of a tax credit, up to the equivalent of 24.5% of the actual expenditure, capped at the PAYE/NIC contributions made by the company in the accounting period.

A company continues to be an SME until it has failed the criteria for two consecutive accounting periods and, similarly, once large, does not cease to be large until it has ceased to fulfill the criteria over two accounting periods.  Special rules apply when a company joins or leaves a group.

Definition of qualifying activities:

Broadly an activity must be seeking to achieve a significant advance in science or technology through the resolution of a scientific or technological uncertainty. The DTI Guidelines give more detail in terms of what HMRC considers being qualifying activities – these can be found via the following link:  http://www.berr.gov.uk/files/file13258.pdf

The definition is deliberately technology-neutral, so that claims are possible from any field of science or technology, other than work in the arts, humanities, social sciences and economics, including engineering and software, not just the more obvious areas such as life sciences.

Definition of qualifying expenditure:

The bulk of most claims will relate to staff or consumables costs, although there are special rules for subcontractor costs and agency worker costs.

Time limit for making a claim:

A claim by an SME or large company for the additional relief at 75% or 30% must be made within two years of the end of the accounting period in which the expenditure is incurred.  For SMEs, if a claim is also made to surrender the enhanced loss for a tax credit repayment, the claim must be made within two years of the end of the accounting period in which the expenditure is incurred.

HMRC Business Records Checks

HMRC published a Consultation Paper on 17th December announcing that they intend to start a programme of Business Records Checks (BRCs) that will review both the adequacy and accuracy of business records within the SME sector. The timing of the Consultation is not ideal with a closing date for comments of 28th February 2011.

Whilst the need to keep proper records in order to comply with tax obligations is widely acknowledged, HMRC’s random enquiry programme indicates that poor record keeping is a problem in around 40% of all of SME cases (circa 5 million). Research by the Organisation for Economic Cooperation and Development (OECD) indicates that poor business record keeping generally leads to an underassessment of tax even where there is an audit-type check into a return for the period covered by such records. On this basis, HMRC's view is that poor business record keeping is responsible for a loss of tax in up to 2 million SME cases annually

As ever with HMRC Consultations, the die appears to be already cast: the programme of checks will happen starting in the second half of this year with HMRC projecting 50,000 reviews annually for the next 4 years. The Consultation is merely concerned with how to implement the programme.

Additionally, the BRC programme will be accompanied by a tariff-based penalty regime for failure to keep proper records. The maximum penalty for failure to maintain business records currently stands (and will remain) at £3,000, but the imposition of any penalty – let alone the maximum - has historically been quite rare. HMRC have said that they do not intend to have a regime which simply levies £3,000 every time there is a failure to keep proper records. The implication is that some level of penalty will be charged, the question is merely how much.

Furthermore, HMRC state in their impact assessment that this initiative will bring in £600million over the four years. Abbey Tax have commented "Are we the only cynics who have worked out that 4 x 50,000 x £3,000 comes to ... wait for it… £600million?!?"

The reasons for keeping proper books and records is far more than just about tax but this does provide an element of the "stick".

VAT Increase

  
The standard rate of VAT increased from 17.5 per cent to 20 per cent today, 4 January 2011.

For any sales of standard-rated goods or services that you make on or after 4 January 2011 you must charge VAT at the 20% rate. If you have a cash business and calculate your VAT using the VAT fraction you must use the VAT fraction of 1/6 on your standard-rated VAT inclusive sales from 4 January 2011.

If you provided goods or services before 4 January 2011 and raised a VAT invoice on or after that date you can choose to account for VAT at 17.5%. You don't need to inform HMRC if you do this. If you started work on a job before 4 January 2011 but finish afterwards you may account for the work done up to 3 January at 17.5% and the remainder at 20%. If you choose to do this you have to be able to demonstrate that the apportionment is fair.

If you provide a continuous supply of services you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier.

If you are a retailer you must use the 20% rate for all takings that you receive on or after 4 January 2011 unless your customer took away the goods (or you delivered) before 4 January 2011, in which case you should use the 17.5% rate. As a retailer you have 28 days to adjust your display prices and during this period you can put up a notice to let your customers know that an adjustment will be made at the till to account for the VAT change. This could lead to some "interesting" conversations.

WW Tax Club

It has taken a little while to get this underway but using the excuse of the start of a New Year, Ward Williams Chartered Accountants are formally launching WW Tax Club today. The purpose of WW Tax Club is to keep businesses up to date on current UK tax legislation so that you can make informed decisions. We will be making regular posts on relevant and topical tax issues that impact upon SMEs. We have also set up a twitter account at http://twitter.com/wwtaxclub as a further method of keeping you informed. We hope you find it useful.