- R&D tax relief increased for SMEs to 200% in 2011 and 225% in 2012
- R&D tax credit repayment no longer restricted by PAYE/NICs
- R&D large company relief to include sub-contractor costs
- Patent box to have more consultation – still 10%, still patents only, applying from 1 April 2013
- Capital allowances for short-life assets now 8 years – useful for capital expenditure that doesn’t qualify for R&D allowances, and exceeds the annual investment allowance
- Reductions in corporate tax rate useful to all companies
- Enterprise Zone changes could be attractive
- 24 new University Technical Colleges to be established
The response to the R&D tax consultation will be published in May 2011, with more details of the following proposed changes:
- removing the rule limiting a company’s payable R&D tax credit to the amount of PAYE and National Insurance contributions (NICs) it pays – very good news for smaller companies that sub-contract work and use externally provided workers, but expect to see a restriction in the size of the repayment as the corporate tax rates are also reducing;
- the £10,000 minimum expenditure condition will be abolished for all companies – largely pointless, if you’re spending less than this then the costs of making the claim will probably exceed the value received;
- some relief will be introduced for work done by subcontractors under the large company scheme – good news, especially for SMEs that have to claim the large company relief because (for example) they receive other State Aid grants;
- SME relief to give a total deduction of 200% from 1 April 2011, and 225% from 1 April 2012 – what’s not to like about this;
- Vaccine Research Relief will be reduced to 20% from 1 April 2011, and will be scrapped for SMEs from 1 April 2012 – only 10 companies a year claim VRR, and I was expecting it to be scrapped for all companies, so this isn’t all that bad.
The need to get EU State Aid approval means it’ll take a while to actually get these changes into law, but the changes should be effective from these dates once approval is obtained – but wait and see what the EU demands as a quid-pro-quo for the changes.
No new consultation yet – but a confirmation that consultation will continue, with a new consulation document out in May 2011 and draft legislation expected in autumn 2011. The rate was confirmed as 10%, and again that it will apply to patents only, and will apply from 1 April 2013. The Budget notes indicate that the patent box is intended to encourage further investment in innovation and retain jobs associated with commercialisation of patents – they may be taking on board the IFS criticisms, and we may therefore see some limitations coming into the next round of consultation. The expected cost of the patent box is indicated to be £500m in 2013-14, £800m in 2014-15 and £900m in 2015-16.
Mainstream tax changes of interest for IP:
The reduction in corporate tax rates (to 20% for small companies on 1 April 2011, already announced, and 26% for large companies, reducing to 23% in 2014) will always be helpful to profitable companies, including those in IP.
The doubling of the short life asset period for capital allowances is welcome. Short life asset treatment allows for a faster write off of assets that are likely to be sold or scrapped within a few years of purchase. This period has been four years, but is to be doubled to eight years in April 2011. For IP companies, this will be useful where there is capital expenditure on assets that don’t qualify for the R&D allowance and where expenditure is over the annual investment allowances limit (currently £100,000 but reducing to £25,000 in April 2012). The extension of time goes some way to mitigating the costs of the reduction in the annual investment allowance, as more assets will now be able to be written off for tax over their useful economic life, rather than the 25 years or more than it can take to write off assets in the main capital allowances pool.
New Enterprise Zones – including one in London – will include 100% business rate discount for 5 years, which might attract IP start-ups and other companies trying to cut costs. Companies with “high value manufacturing” in the zones may also qualify for improved capital allowances.
The extensions to EIS/VCT reliefs from April 2012 may make it easier to raise funding for start-ups and other companies, as investors may want to make more use of those reliefs. Income tax relief for the investor will be increased from 20% to 30%, and the maximum annual investment per individual will be raised from £0.5m to £1m.
Limits on the size of qualifying companies will also increase, with the limit on employees increasing from 50 to 250, and the gross assets limit increased from £7m to £15m (pre-investment). The maximum investment that the company can raise will be increased from £2m to £10m.
The increase in the lifetime limit for entrepreneur’s relief from £5m to £10m will be attractive for those involved with start-ups and other companies; this doubles the amount on which the reduced capital gains tax rate of 10% applies.
IR35 rules (employment tax on personal service companies, often used by IT industry contractors in particular) will not be abolished, but HMRC plans to try to simplify by improving administration. Which is to say, not simplifying the rules at all. The most useful point is likely to be the proposal to restrict IR35 reviews to high risk cases, and to use specialist teams on these. As long as someone tells the local inspectors, that might help improve matters.
Enhanced capital allowances are to be extended to certain energy efficient hand-dryers – this gives a benefit to the purchaser, but also makes the product more attractive and so benefits the manufacturer/vendor. ECAs are generally available for innovative products which are more energy efficient.
The VAT exemption for cheap imports is being reduced from £18 to £15 – mostly because of complaints about cheap DVDs supplied from the Channel Islands by online retailers. Expect to see Amazon/Tesco/Play etc reduce prices on certain DVDs to £14.99 – although there is the threat/promise of a review next year if there’s no workable solution found to the problem in the meantime. The Budget note refers to “the willingness of UK companies to relocate their operations outside the EU to exploit the relief” – might be better described as the desire of the UK consumer for a “bargain”.
An exemption from income tax is to be introduced for subsistence allowances paid to experts seconded by their employers to the European Medicines Agency, and other EU bodies in the UK. The exemption will be for the expert, and brings the UK into line with other EU countries.
Controlled foreign companies interim reform continues apace – the Budget notes say that there have been some changes to the new exemptions (for IP holding companies and trading companies with little UK connection), but doesn’t detail what these changes are. More information to follow when the Finance Bill is published.
Foreign branches exemption to be included in Finance Bill 2011, as expected, but no new details as to whether there are any changes following the recent consultation.
Tax tidying up:
The corporate intangible fixed assets rules will be changed so that they don’t apply to oil licences – it was never intended to apply to them.
Film tax relief will be re-notified to the EU, to extend approval beyond 2012.
The relief for pool betting duty related to the arts will be abolished next year, after consultation.
Other announcements (non-tax):
£100m new capital funding for science and innovation campuses for the commercialisation of research, accommodation of innovative SMEs (“innovative” not defined, but likely to mean patent-seeking) and new research capabilities.
£150m new capital funding to support technical education, including 24 new University Technical Colleges by 2014
A “new” Technology and Innovation Centre in high value manufacturing, integrating various existing centres around the country.