UK: Tax Focus: A Summary Of Current Tax Issues For Companies - May 2012

R&D TAX CREDITS FOR ENTREPRENEURS

By Laurence Bard

Despite being on the statute books for over a decade, there are still companies not claiming the hugely valuable research and development (R&D) tax relief. This is often because they do not realise they are carrying out R&D, and nor do their accountants who see only 'wages and salaries' in the accounts.

What is R&D?

Projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty can qualify as R&D for tax relief. R&D may be undertaken even where similar development has been undertaken by a competitor but retained as a trade secret. There is inevitably considerable ambiguity in many cases, so each case must be looked at on its own merits.

R&D is not restricted to the oft-cited life sciences, but covers companies in virtually every industry which are undertaking some form of innovation; this will include innovation in products and services, as well as in their support functions.

Industries for which we have successfully made claims include construction, advertising, telecoms, financial services, and gambling as well as the more obvious manufacturing, energy, defence and life sciences industries. Software, internet and communications are good examples where R&D takes place in supporting functions in such industries as well as industries in their own right.

What's it worth?

Where a company is taxpaying, the extra relief can be worth up to 31% of cost. Alternatively, where a company is loss making, the relief can give rise to tax repayments of as much as 25% of the cost, even where no corporation tax has ever been paid. This is of considerable assistance to start-up's in need of cash to fund their R&D.

To qualify for these levels of R&D relief, the company must be an SME; this requires fewer than 500 employees, and either turnover not exceeding €100m, or balance sheet total not exceeding €86m.

Qualifying expenditure

Qualifying R&D expenditure includes employee and agency costs, software and consumables and subcontracted expenditure. For periods ending after 31 March 2012 there is no minimum spend.

Making claims

There are numerous other rules and claims have to be made within two years of the end of an accounting period. HMRC gives no leeway here. It also has special R&D units who consider claims in detail, so it pays to prepare them carefully.

SEIS

By Adrian Walton

Following the announcement in the Autumn Statement, the Government has introduced the new Seed EIS (SEIS) for shares issued after 5 April 2012. The rules are summarised as follows:

  • in order to qualify for the SEIS, a company must be undertaking, or planning to undertake, a new business, and have fewer than 25 full-time employees and gross assets of less than £200,000 at the time of the SEIS investment;
  • qualifying companies will be able to raise a total of up to £150,000 under the scheme, and funds raised must be used within three years. Once 70% of funds have been utilised, the company may raise funds under the EIS or from VCTs;
  • the scheme offers up-front income tax relief of 50% for subscriptions of shares by investors of up to £100,000 (which can include directors). It should be noted that a claim for relief under SEIS may not be made until at least 70% of the money raised by the issue has been spent by the issuing company for the purposes of the qualifying business activity for which it was raised;
  • the individual investor limit for SEIS will be £100,000 per tax year; and
  • there is no CGT payable on the disposal of SEIS shares held for more than three years.

Furthermore, the rules provide for an exemption from CGT on gains realised from disposals of other assets in 2012/13 where the gains are reinvested through the new SEIS in the same year.

The new SEIS is a welcome development, enhancing the EIS tax reliefs available for equity investments in smaller companies. However, it is widely thought that the limit of £150,000 that a company can raise under the scheme is far too small to make any meaningful difference to the funding options for small companies.

ON THE FACE OF IT – WHAT IS CHANGING FOR VAT ON VOUCHERS?

By Antje Forbrich

HMRC Brief

On 10 May 2012, just a week after the Lebara decision which suggested that the current UK rules on vouchers are not in line with European law, HMRC released its Brief 12/2012 announcing immediate changes to the treatment of certain face value vouchers.

The changes affect single purpose vouchers, i.e. vouchers that entitle the holder to only one type of goods or services which are all subject to a single rate of VAT. An example of a single purpose voucher would be one giving entitlement to telephone calls. An example of a voucher not affected by the new rules would be a voucher that could be redeemed for either zero-rated printed books or standard-rated electronic books. The sale of a single purpose voucher will now be regarded as a supply of the underlying goods or services and VAT will be due at the time of sale (rather than at the time of redemption, as at present).

The changes apply with immediate effect, although the Finance Bill containing the changes requires Royal Assent. Affected businesses can therefore choose to implement the changes with effect from 10 May or continue with the current VAT treatment until Royal Assent has been given and make a retrospective adjustment at that point in time.

EU VAT proposals

On the same day the EU Commission released amended proposals for including voucher rules in the VAT Directive which are intended to be implemented by 1 January 2015. The proposals address issues such as the definition of a voucher, the time of supply, the distinction between vouchers and mere payment systems, the VAT treatment of multiple purpose and discount vouchers, and the VAT treatment within distribution chains. The intention is to achieve a consistent VAT treatment of all kinds of voucher across all EU member states.

What now?

For the time being, only businesses involved in transactions regarding single purpose face value vouchers are affected. Businesses involved in transactions concerning other types of voucher, particularly in cross-border situations, should examine their supply chains and the respective agreements, and might want to review the current VAT treatment in the light of the EU proposals.

Achieving a harmonised approach across the EU would be very good news, but even if the new rules could be implemented as envisaged, there may still be some practical question marks, e.g. how to keep track with technological developments especially regarding payment facilities.

ONE MAN'S TAX PLANNING IS ANOTHER'S AVOIDANCE

By Richard Mannion

Over recent years there has been a continued focus by Government and HMRC on combatting artificial tax avoidance and filling in the 'gap' in expected tax revenues. In 2004, legislation was introduced requiring promoters of tax avoidance schemes to notify HMRC of any new arrangements which has enabled HMRC to take early counter-action.

During this time the tax courts have found new ways to interpret the legislation in the way 'that Government intended' or rather would have intended if it had realised that taxpayers would exploit a loophole.

In addition, HMRC has started to work in a smarter manner by marshalling its human and technological resources to find funds hidden in foreign bank accounts, seek out traders evading tax on their business profits and to investigate the fine details of complex schemes designed to mitigate tax, such as film finance schemes.

There is a clear distinction between tax evasion, which is illegal, and planning so as to avoid paying more tax than is required. Old tax case law had established that taxpayers are entitled to take action to minimise their contributions to the state and, in an often quoted 1929 judgement, Lord Clyde said the taxpayer was "entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue".

Over recent months the morality of both contrived and standard planning has come under scrutiny in the media, with the inference that anyone who pays less than the potential maximum is failing to do their bit for society. This has to perhaps be taken into account in tax planning as well as the technical basis for any tax computation.

So where do we go to from here?

On the one hand Government continues to offer tax advantages to selected investments like ISAs, EISs and VCTs and it gives special reliefs for worthy causes like R&D, business property renovation etc. There has also been much talk of giving support through the tax system to smaller businesses.

On the other hand George Osborne said in the 2012 Budget that he regards tax evasion and aggressive tax avoidance as morally repugnant and announced that the war against contrived avoidance will step up a gear next year with the introduction of the general anti-abuse rule (GAAR). In addition, new SDLT charges on expensive properties purchased by offshore companies have been introduced and a consultation is due shortly on the prospect of restricting tax reliefs, including charitable donations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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