The Autumn Budget published on November 22, 2017 contains – unsurprisingly – a number of measures relevant to IP tax (unsurprising, because the UK government seems to think that tech will save the UK from the perils of the Brexit decision).
The main headline tax change is the increase in the rate of the R&D Expenditure Credit (RDEC) from 11% to 12% for expenditure incurred on/after 1 January 2018. The mechanics of RDEC mean that the RDEC value to claimant companies will increase from 8.9% of expenditure to 9.7% of expenditure at the current rate of corporation tax (and will be worth almost 10% of expenditure when the corporation tax reduces to 17% (planned for 2020).
RDEC seems to be having some minor success, albeit not absolute. The most recent figures from HMRC indicate that the number of large companies claiming R&D relief has increased from 2380 in 2012-13 (the last year of the large company super deduction) to 2610 in 2015-16. However, the total number of large company claimants was 2735 in 2014-15 and 2790 in 2013-14 – the numbers for 2015-16 are provisional, but it does suggest that any initial enthusiasm about RDEC among large companies is not being sustained at the same rate. At the same time, the number of claims under the SME relief has increased substantially each year (from 13,140 in 2012-13 to 21,865 in 2015-16).
Perhaps more notably, the number of SMEs claiming under those reliefs has increased from 580 in 2012-13 to 1780 in 2015-16: presumably the message that this relief is still available for some expenditure that doesn’t qualify for the SME relief (eg: because it is covered by a grant) is getting through, as the rate of rise is considerably larger (as a proportion) than the rise in the number claiming SME relief.
The other Autumn Budget announcement, of a pilot of an Advance Clearance Service for RDEC (para 2.24 of OOTLAR – no other details yet available), may be a response to those figures. An Advance Assurance Service has been in place for first-time small SME claimants for a couple of years now; this will be bolstered with a “campaign to increase awareness of eligibility of R&D tax credits among SMEs” (again, no details yet).
Intangible fixed assets
The intangibles rules will be subject to consultation in general in 2018, with the consultation reviewing the regime, “which is now more than 15 years old, to consider how it encourages growth and whether there are targeted changes that can be made” (para 2.31 of OOTLAR – no more details). There are plenty of other tax regimes that are more than 15 years old which have no prospect of review, so I suspect it’s not so much the age of the regime as the economy in general that is prompting this review.
There are also some tweaks to the corporate intangibles tax rules (para 1.23 of OOTLAR): changes will come in the next Finance Act to ensure that licence arrangements between a company and a related party in respect of intangibles are subject to the market value rule (in s845 CTA 2009). Market value provisions will also be brought into to apply on realisations of an intangible, where consideration is wholly or partly something other than cash (in such a case, it is the market value of the consideration that would apply). Both these changes will apply from Budget day (November 22, 2017). The purpose behind the changes is to deal with some avoidance schemes that exploited net book value accounting in ‘step-up’ arrangements to generate a low tax cost to the licensor with a higher tax deduction for the licensee.
Consultation incoming on 1 December 2017 on widening withholding tax on royalties (again – having widened these rules in 2016 for the first time in decades, the government is clearly on a roll with the idea that withholding tax may be a ‘good idea’). The announcement is in para 2.7 of OOTLAR, which has no more details other than that the changes will have effect from April 2019.
However, the government’s position paper on corporation tax and the digital economy has more information on the possible extension of withholding tax – sections 4.13-4.19 and box 4.A indicate that the government is considering a withholding tax on royalties paid between two non-UK companies which relate to a licence of intellectual property used to sell digital services by one of those two companies to UK customers, where the licensor is in a low-tax jurisdiction to which the UK has not ceded taxing rights on royalties (ie: most low-tax jurisdictions).
The position paper of course doesn’t address the elephant in the room: how to collect this tax when neither company has a UK taxable presence. If it only applies to business customers then there would be some scope for ensuring that the customer has to withhold the tax and account for it to HMRC – we have tax rules for that type of collection already. If it’s to apply to consumer customers, then the whole process would seem to need some form of third party collection mechanism if it is to function other than voluntarily, as there is no mechanism in place for consumers to account for tax to HMRC in this way – and introducing one would seem to be counter to the UK general approach of trying to minimise the need for consumers to interact with HMRC. The position paper does, by implication, suggest that the withholding obligation may fall on banks and credit card companies (para 4.10, ‘collection mechanism’).
Nevertheless, such an extension of withholding tax seems an inevitable response from government (UK and otherwise) as a means of attempting to tax non-resident businesses with substantial local sales – the UK is very unlikely to be the only country introducing such measures over the next few years.
Following on from that point, the position paper on taxation of the digital economy does rather echo the EU Communication on taxation of the ‘digital single market‘, which is to say that it doesn’t say very much concrete beyond the withholding tax idea above. The position paper (as with the EU Communication) leans towards the idea of a digital permanent establishment (although it doesn’t use the term) with a taxable presence created by ‘user participation’.
The focus is clearly on digital businesses whose value Is driven by the users – although at least one of their examples (para 5.5) is slightly questionable: “businesses that provide an online marketplace for buyers and sellers of goods/services and take a commission from the resulting transactions” seem rather different to the other examples, which rely on specifically targeting a user base with ads and/or services. A straightforward online marketplace alone does not, to me, seem to be particularly different (other than in potential geographic reach) to the classified ads in a newspaper, or an auction house.
The paper, as with the EU Communication, proposes some form of interim action until such time as the OECD/G20 etc get their act together and agree international tax reform. the UK seems to favour a “tax on the revenues that businesses generate from the provision of digital services to the UK market” (para 4.10). The focus, as noted above, is on revenues from providing intermediary services and online advertising. The paper suggests that it would be less relevant to businesses whose revenue comes from selling goods and digital services – although the withholding tax proposed in the Autumn Budget and referenced in this paper applies clearly to sellers of digital services, so the “scope” in para 4.10 is not particularly consistent with the rest of the paper. There is no information as to how such a tax would work when imposed on a company in a country with which the UK has a tax treaty giving taxing rights over business profits to the treaty country.
The paper does ask (para 5.16-5.19) “How does this interact with the role of the UK as a global digital hub?” but does rather singularly fail to answer the question. Imposing UK taxes – which may, or may not, be creditable in the business’ state of residence – seems unlikely to be compatible with the also stated aim of “ensuring that the UK remains a competitive place to do business”.
Without any discussion as to the position in relation to tax treaties (other than a passing reference to the withholding tax proposal being in line with tax treaties – mostly by only applying where the UK has no relevant treaty provisions!) the position paper seems nothing more than impractical fantasy: trying to impose a new tax on the profits of a company which is resident in a country with which the UK has a tax treaty that gives taxing rights over profits to the country of residence seems basically ineffective. The UK has some form on this, with the diverted profits tax, which the government maintains is a new tax not covered by treaties. The DPT seems tolerated on the basis that it attaches to avoidance structures, but it seems unlikely that other jurisdictions will be particularly inclined to give credit for a user/revenue based UK tax that has no relationship to avoidance.
There are a number of other IP-related announcements scattered through the provisions:
- EIS/VCT changes for knowledge-intensive companies
- EIS investor limits doubled to £2m for investment in knowledge-intensive companies
- EIS/VCT company investment raising doubled to £10m per year for knowledge-intensive companies (lifetime limit remains at £20m, so this just allows for faster fundraising, not more fundraising)
- linking EIS/VCT maximum age limits to turnover threshold for knowledge-intensive companies
- consultation to come in 2018 on a new knowledge-intensive EIS fund structure, allowing for capital raised to be used over a longer period (para 2.10 of OOTLAR)
- Proposed measures to finance growth in innovative firms, particularly ‘patient’ (long term) capital investment
- a number of non-tax investment funds
- unspecified actions to enable businesses to leverage intellectual property in borrowing for growth