We are nearing the implementation of tax legislation which aims to increase the international competitiveness of the UK as a location for businesses including changes to the R&D tax regime, the Patent Box and changes to controlled foreign companies legislation.
A new regime for large companies has been proposed. While under the current regime, companies or groups of companies with at least 500 employees or with turnover greater than £100m may claim a 30 per cent enhancement on certain costs incurred on qualifying R&D activities.
Under the new rules, it is anticipated that the impact of the R&D tax relief is likely to be reflected in the company’s financial results reported before tax (hence “above the line”). It is also anticipated that the tax relief is to be credited against any tax liability of the company including corporation tax, PAYE, national insurance, etc.
This means a large company incurring trading losses as a result of its R&D activities will be able to surrender them for a tax refund rather than carry them forward to offset against future trading profits, as is the case under the current regime. This will accelerate the cash flow benefits of undertaking R&D and may be particularly attractive for new overseas investors setting up innovative businesses for the first time in the UK.
The government is to introduce a new preferential tax regime for profits arising from patents, known as the Patent Box, that will allow companies to apply a 10 per cent corporation tax rate to profits attributed to patents and certain other qualifying intellectual property from 1 April 2013. This will be in place of the mainstream rate of 24 per cent (23 per cent from 1 April 2014) that would otherwise apply. Relief is to be phased in over of a period of four years, starting at 60 per cent of the benefit, with the full relief available from 1 April 2017.
Companies that qualify for the Patent Box will be able to enjoy an annual tax saving of up to £130,000 on qualifying patent profits of up to the £1m per annum under a simplified “small claims” procedure. For companies willing to meet the additional requirements of the rules for larger claims, greater annual savings will be available.
Companies should begin to consider now whether they will be able to benefit from the Patent Box regime. They should seek advice as to whether they own qualifying patents, and if so, should review the calculations required in order to ensure that Patent Box profits qualifying for the 10 per cent tax rate are maximised. Systems will need to be in place going forward to capture the data necessary to undertake the calculations, and some information for prior years may also need to be extracted.
If a company currently has no patents, but has intellectual property that is potentially patentable, consideration should be given to doing so. The process of obtaining a patent is quicker and less costly than is sometimes thought and the significant tax benefit available if a company can qualify for the Patent Box may make this an option well worth exploring.
Controlled Foreign Companies
The government launched a consultation exercise on reforming the rules in 2007. After numerous redrafts, the consultation period on the most recent draft legislation ended on 10 February and the new rules will be implemented in this year’s Finance Act, to take effect from 1 January 2013.
The positive news is that, despite the long path that has been taken to reach this point, the proposed new rules contain numerous new exemptions and partial exemptions that were not present in the old legislation. As a result, they are much more accommodating of modern business practice. They also help to address the UK’s tax competitiveness gap compared with many other of our European neighbours who do not have CFC rules, whilst still trying to protect the UK tax base from the artificial diversion of profits to low-tax offshore jurisdictions.
The cost of this is a huge increase in complexity. This is not helped by the far from helpful structure of the new legislation, which no doubt reflects the inelegant process by which the current proposals have been arrived at, and also the rapidly dwindling time remaining to HMRC and the parliamentary draughtsmen before the Budget.
George Bull is head of the professional practices group at Baker Tilly.