Her are the changes we expect to see in the draft finance bill, which will be published on December 6.
The Patent Box
We expect to see a “Patent Box” regime proposed. This will encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK.
The government intends to introduce a ten per cent rate for profits arising from patents, to apply from April 1, 2013. This should provide an effective incentive to create and retain IP in the UK.
Research and development
R&D is another key area which will probably see legislation or further consultation in the draft finance bill. R&D drives innovation and provides growth opportunities, not only for the companies involved but also for the wider economy through the development of new tech and improved products.
There are three separate R&D tax credit schemes in the UK. The most relevant one here is the SME scheme. Introduced in 2000, it allows eligible companies to enhance qualifying R&D expenditure by 75 per cent in order to reduce tax liabilities. If a SME company is loss-making, then it may be able to exchange the tax relief for a payable credit worth 24.5 per cent of qualifying expenditure.
Under current definitions, R&D activities must “seek an advance in general knowledge or capability in science or technology through the resolution of scientific or technological uncertainty”. But BIS guidelines state that “the production and distribution of goods and services” don’t directly contribute to solving this uncertainty without giving any clarity on “production” (especially in regards to experimental trials and prototypes).
We expect further consultation on what constitutes R&D and what is properly “production”.
In terms of disposals of shares in a trading company, Entrepreneurs’ Relief is available provided that the individual making the disposal is an officer or employee of the company, and owns five per cent or more of both the share capital and voting rights in that company.
These conditions have to be met for a period of at least 12 months prior to the disposal. Once the conditions have been met, all of the company’s shares and securities held by the individual qualify for Entrepreneurs’ Relief ” including any acquired only months or weeks before the sale.
There have been calls for the five per cent shareholding requirement to be removed and we think its existence creates an unfair cliff-edge .
However, we expect the threshold will be retained. Expect new anti-avoidance legislation to prevent structuring that gets around the threshold by using joint venture companies to invest.
George Bull is a senior tax partner at Baker Tilly