International Tax Newsletter - Winter 2011-12 - United Kingdom
CHANGES PROPOSED TO REMOVE CURRENT RESTRICTIONS ON QUALIFYING EXPENDITURE
The UK Government has taken significant measures this year to encourage innovation and research & development activity in the UK through a series of proposed reforms to the corporate tax system, including the following:
R&D tax relief
The UK has had a special tax relief for R&D expenditure since 2000. Broadly speaking, relief is available to small- and medium-sized companies (SMEs) for 175% (130% for large companies) of eligible expenditure (including staff costs, computer software and consumable items) on projects that seek an advance in science or technology through the resolution of uncertainties. Loss-making SMEs are able to claim a payable tax credit instead of claiming an enhanced tax deduction.
The rate of relief is increased from 175% to 200% from 1 April 2011 and to 225% from 1 April 2012. These increases are subject to EU state aid approval. Further changes, also proposed to apply from 1 April 2012, are intended to remove some current restrictions on qualifying expenditure and to make the rules easier to apply. The changes are expected to be of most benefit to SMEs.
- The existing requirement for the company to spend at least £10,000 in the year concerned on qualifying R&D expenditure is to be abolished.
- The current cap on the amount of payable tax credit is to be removed. At present, the credit cannot exceed the income tax and National Insurance payments made by the company in respect of all its employees during the year concerned.
- The Government is considering how it could implement a system whereby the benefit of the tax relief is recognised ‘above the tax line’ in the company’s accounts. This would probably require the extension of the payable tax credit to large companies.
- Changes are proposed to the rules for allowing relief for expenditure on sub-contractors and externally provided workers.
- There is currently uncertainty as to the amount of eligible expenditure where R&D is carried out in the course of production activities. Draft guidance has been published which will hopefully clarify the boundaries in this area.
- A new upfront clearance procedure has been proposed for smaller companies and new start-ups.
The Government has also proposed that a new patent box regime, based on the Dutch model, will be introduced from 1 April 2013. Although all UK resident companies (and UK branches of overseas companies) will be able to apply the regime, it is expected to be of most benefit to larger companies with significant patent and similar income.
The regime would apply a reduced rate of tax on income from patents granted by the UK’s Intellectual Property Office and the European Patent Office. It may also apply to patents granted by selected national patent offices of some other European countries.
In addition, the Government proposes to include other forms of intellectual property (IP) within the regime that have a strong link to R&D and high-tech activity and are subject to examination by an independent authority. These include regulatory data protection and certain plant variety rights.
It is proposed that the rate of tax on eligible income will eventually fall to 10% by 2017 but this will be preceded by a gradually reducing rate year-on-year from 2013 onwards.
The reduced rate is intended to apply both to the legal owner of the IP and anyone holding an exclusive licence to exploit it commercially. However, the company concerned must have performed significant activity in developing the patented invention or its application. In addition, it must remain actively involved in the ongoing decision making connected with exploitation of the IP.
The regime would cover worldwide income earned by UK businesses from inventions covered by a currently valid qualifying patent. This would include both royalties and income from the sale of any products incorporating at least one of such inventions.
Companies will be free to opt in and out of the regime at any time and some companies may choose to remain outside if the prospective tax saving is small and the administration cost in identifying that saving is comparatively high.
More information on these developments can be provided by Jon Hills, Partner — Tax services, PKF(UK)LLP Accountants and business advisers, and specifically regarding the availability of R&D tax relief in the UK through Denise Roberts, PKF (UK) LLP’s leading expert in this area, through the EisnerAmper contacts listed on the homepage.
International Tax Newsletter - Winter 2011-12 Issue