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• for large companies only, SME relief stays the same
• consultation on whether or not the ‘above the line’ credit should replace the large company relief altogether
• reasons for it: visibility of R&D credit outside the tax department (seems like rewarding poor communication, but maybe I’m too cynical); certainty (because you get something, even if it’s a loss repayment – this one’s a fair point); and the ability to get something for losses
• there will be further review of the problems of R&D relief for work subcontracted by a large company
• the ‘above the line’ credit seems likely to be a State Aid, which may cut relief for SMEs that get State Aid grants (currently, they can claim large company relief on the project instead)
• minimum rate for the credit: 9.1% before tax – not subject to consultation. Treasury will decide on final rates after the consultation (note: not ‘after consultation’, but ‘after the consultation’; we don’t get a say, which suggests that the declining value of the large company relief isn’t likely to be addressed overall).  A 9.1% credit after 22% tax (from 2014) is a 7.1% post-tax benefit (to 1 d.p.) post-tax, which seems better than the current large company relief (30% relief at 22% is a 6.6% post-tax benefit).
• The repayable credit for loss-makers will be a cash repayment, probably at a discounted rate. The SME repayment credit is barely discounted when compared to the immediate benefit for taxable SMEs, and this discount is largely to simplify the maths rather than discount fully – a loss-making SME can claim a repayment of up to 24.75% of R&D expenditure & relief (11% of 225%) from 1 April 2012; the additional tax saving for a tax-paying SME claiming the relief would be 25% of expenditure (125% at 20%).  Of course, if the SME kept the overall loss, it would be worth £45 (225% at 20%) against profits in the future because the full loss on R&D expenditure is surrendered, not just the additional relief – so the repayment is substantially discounted against future benefit
• The ‘above the line’ credit would reduce the taxable expenditure on R&D in the profits, and then is deducted from any tax due – see the government’s simplified example in the paper. For taxable companies, the credit is first taxed and then deducted from tax. For loss-making companies, the credit would reduce losses and then be repaid.  Unless it’s tweaked, the effect on losses for large companies would seem to be less than that for SMEs.
• There are a couple of options on repayment, intended to ensure that companies don’t have loss relief and a repayment as the Government seems to think large companies would be better able to offset losses elsewhere in the business.

Option 1 – repayment net of tax:

• The first option for the  repayment of the ‘above the line’ credit is for it to be paid net of tax.
• However, that tax deduction from the credit could be carried forward to be offset against other liabilities where the losses are not used elsewhere.

Option 2 – discounted credit:

• The second option is a reduced payable credit – the paper suggests that “the ATL credit would be paid at a discount of (for example) 80 per cent”.  When you look at the example, it looks more like they mean a discount of 20%, as the credit given is 80% of the credit otherwise available. That is, it’s a discounted rate of 80%, not a discount of 80%.
• The discount could be reclaimed by companies who return to profit within a short period – three years from the year of claim is suggested – to ensure that they aren’t prejudiced by comparison with the current system that allows them to roll forwards the losses.  Can we introduce this for loss-making SMEs as well, please?
• There’s a suggestion that there may be some anti-avoidance rules around artificial diversion of profits to the R&D company to avoid a reduction in credit

Option 3 – considered and rejected, a system similar to the French version which pays a reduced credit and then pays the remainder of the credit over four years

• otherwise, if you have any bright ideas based on other international schemes, please let them know.
• there’s then a series of questions that the consultation would like a response to: particularly, should the ‘above the line credit’ be mandatory for large companies, replacing the current large company relief?
  
• There doesn’t seem to be any strong support for replacing the SME scheme with an ‘above the line’ credit (unsurprising, as the SME relief is already repayable, and smaller companies are less likely to have the communication issues that mean the relief isn’t recognised as belonging to R&D)
• SMEs would be able to claim the ‘above the line’ credit where necessary
• The Government doesn’t want UK branches claiming the relief where there’s little/no UK real activity – a PAYE/NICs cap is proposed (the PAYE/NICs cap is dead, long live the PAYE/NICs cap) as well as (surprise!) a general anti-abuse rule, incorporating a purpose test.

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New creative industries relief
Much requested, here at last!

• Video games industry relief
• Quality TV (“Birdsong” was the Chancellor’s example) relief
• TV Animation relief (aka the “Wallace and Grommit relief”)

These reliefs are intended to come into play in Finance Act 2013 (so, probably, from 1 April 2013) – but will need EU State Aid approval, so this isn’t writ in stone.  There will be consultation over the summer but it wouldn’t be highly surprising to see the new reliefs echo the existing film relief.

VAT relief for European Research Infrastructure Consortia (ERICs)
Secondary legislation will be introduced in autumn 2012 to provide VAT relief for European Research Infrastructure Consortia – no more details yet.

Patent box update
Various tweaks have been announced:

• the legislation has apparently (not yet published) been clarified to ensure that that worldwide income from inventions covered by a qualifying UK or European Patent Office patent is included.
• extending qualifying IP: in addition to patents granted by the IPO and EPO the Government intends to extend the Patent Box to other EU Member States which have similar examination and patentability criteria as the UK. A list of qualifying patent jurisdictions will be published as secondary legislation in 2012.
• the heads of expenditure included in the amounts which have to be marked up have been clarified; and
• the small claims safe harbour that previously applied to all companies has been limited to companies making profits with residual profits of no more than £3 million.

R&D tax credits update
As announced late last year, there will be a new ‘above the line’ R&D tax credit in Finance Bill 2013 to encourage R&D activity by larger companies. The Government will consult on the detail (supposed to be published today, but no sign of it so far).  It will ensure that SME R&D incentives are not reduced as a result of this change, thankfully.  The above the line credit is useful to larger companies in particular, where the value of the R&D credit isn’t always seen in the R&D department, as it’s a tax item.  Ensuring it’s related to the R&D costs in the accounts would help here; the above the line credit would also have to be repayable (otherwise the auditors probably wouldn’t allow it in the accounts of a loss-making company).

Not specifically IP but useful to IP companies:

Employee share option schemes
The EMI share option scheme rules are being amended from April 2013 (subject to EU approval) so that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for capital gains tax entrepreneurs’ relief, and the Government will consult on ways to extend access to EMI for academics who are employed by a qualifying company (for biotech spinouts, most likely).  The EMI scheme allows companies to give employees options over shares with income tax – and now capital gains tax again – advantages.

Investment – relaxing EIS & VCT rules
The EIS and VCT schemes allows small companies to raise cash with tax relief for the investors.  The changes will widen the definition of shares which qualify for relief; and remove the £500 minimum investment limit.

Subject to State aid approval, legislation will also be introduced in Finance Bill 2012 to increase the thresholds for the maximum size of qualifying company for both EIS and VCTs and the maximum annual amount that can be invested in an individual company under all the venture capital schemes.

The quid pro quo, because there had to be one, is that the total investment which a company can receive in one year will be £5 million in total from any State-aided risk capital measure, including EIS and VCT.

Corporate tax rate
The company main tax rate is being cut again – it will be 24% from April 2012 (rather than the 25% previously announced) and will be 22% by April 2014 if the Chancellor doesn’t cut it again!

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Broadly, qualifying bodies are UK charities, universities, scientific research organisations or health service bodies. The Treasury can also specify particular bodies by Order, which is what this latest Order does: it sets out a list of overseas bodies that will be regarded as qualifying bodies – these are all universities, with a focus on medical faculties in particular.

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Anyway, the Telegraph is now reporting that HMRC have concluded a number of image rights settlements in relation to footballers and football clubs (but not Rangers – apparently the tax bill that tipped them into administration related to employee benefit trusts rather than image rights).

The use of image rights allow a club to pay an amount to the player for the use of their image (note: not a payment of part of their wages – that would still be employment income and taxable as such. Which is where the disputes all started, of course).  The image is used by the club in promotions, and payments (where structured appropriately) can be made to offshore companies etc – most useful for non-UK domiciled players.  The player’s tax bill depends on where they are domiciled and how the payment is structured, but the main thing is that a payment for image rights is not employment income and so there’s no NICs involved – for the player or the club – and any tax is dealt with under self-assessment and not PAYE, so that there’s a timing/cashflow benefit to the player in particular.

The key point is that the image rights payment has to reflect the value of the player; there’s really little point in claiming that Joe Bloggs in a club in the Vauxhall Opel League division 10 (yes, I know, I know. I know nothing about football. I never claimed to be anything other than a tax lawyer!) is worth £10k a month in image rights when the club pays him £250 a month to play.  The disputes with HMRC have generally been around this point: what is a player’s image worth?

Accordingly to the Telegraph, the Premier League mediated the settlement, establishing a cut-off date before which payments would not be contested, and agreed a banding system for clubs of differing profiles.  The details of the settlement haven’t been generally published, but Chelsea’s accounts last week showed a payment of £6.4million “in relation to an industry-wide investigation into the taxation of payments under image rights”.

For those footballers with an image that’s actually worth something, perhaps they should look to Guernsey: the island is proposing to establish an image rights register to assist with protecting such rights.

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