UK: Financial Services And Markets Group Bulletin – Winter 2012/13

Last Updated: 9 January 2013
Article by Colin Aylott


By Paul Derry, Pawel Piotrowicz and Colin Aylott

The tax benefits from the forthcoming 'patent box' tax regime are substantial – a reduced rate of corporation tax on relevant profits, decreasing from an approximate effective rate of 16% in 2013 down to an effective rate of 10% from 2017. So how do you determine whether any technical innovations you make might qualify as inventions that are patentable and could reduce your corporate tax liability?


To benefit from the patent box, certain criteria need to be met. For most companies, this will involve obtaining a UK or European patent that covers a technology which generates profit. So, could a company in the financial services sector obtain a UK or European patent for an innovation? The assessment is necessarily very technical and management may need to discuss it with the individual responsible for the relevant technical innovation before any conclusions can be reached. Advances in information technology (IT) can qualify.

The criteria for patentability are the same in the UK and in Europe; the invention:

  • must be new
  • must not be obvious
  • must not be excluded from patentability.

There are exclusions for 'methods of doing business' and 'programs for computers', but in practice it can be quite simple to avoid the exclusions and many patents have been granted for such things.

Fundamentally, if an invention provides a technical advance over what is already known (already known work is called the 'prior art'), it is not excluded from patentability. The technical advance can be almost anything. Patents are granted for inventions that provide a new technical function, that perform a task more quickly, with lower resource (processor, memory, bandwidth, etc.),

more reliably, more securely, or even in a way that is more convenient for a user. The invention must also not be obvious over the prior art; this is not much of a hurdle in many cases.

Beneficial research and development (R&D) tax reliefs for qualifying expenditure should also not be overlooked (see the article 'Are you claiming R&D tax relief on software development?' in the spring edition of this bulletin).

Existing patents

It may help to look at some existing patents to get a better idea of the sorts of invention which can be patented, particularly as some patents are granted in areas which, on first sight, do not obviously qualify. However, closer inspection of the applications shows that the area of use is usually a minor consideration. Instead, what is important is the invention.

Trading system

European patent EP 1641213 concerns a trading system. The invention improves the processing of messages to reduce processing throughput time. The difficulty was in demonstrating that the invention did not simply achieve faster processing, which could be the result of mere automation, but rather that it reduced throughput time. This suggests that the invention affects the way in which the underlying computer operates. Furthermore, the technical features which provide the solution are plainly set out in the patent claims. The claims relate to a method of crediting an account in a certain way that is at least slightly more secure than the closest prior art.

Payment system

European patent number EP 1286317 relates to payments. It defines the invention in terms of a "method of crediting an account ..." which includes various steps, some of which relate to handling validation information. The effect of the invention here is a

secure way of crediting an account. The technical features which provide the solution are plainly set out in the patent claims. What the claims cover is a method of crediting an account in a certain way, a way that is at least slightly more secure than the closest prior art.

Mathematical simulation

Our last example, EP 1257904, relates to a particular way of reducing the computation outlay for a mathematical simulation. While this patent related to circuit simulation, it could easily relate to simulation of something else, such as a stock market or other financial system. Other European patents have been granted in the area of simulating or modelling other systems.

So what can we learn from these examples and others like them?

European and UK patents are granted for computer-implemented innovations, even when the innovation relates to improved trading or some other nontechnical endeavour. That does not mean to say that all patent applications in the field of payment and trading systems will succeed. Each innovation or invention is different and the chances of success depend on the nature of it, as well as how it is presented and described in the application to the patent office.

Next steps

Once you have decided that you want to patent your technology, what do you have to do? The first step is to identify an invention (or inventions) that is suitable in that it is potentially patentable and commercially useful. Then speak with a patent attorney for a view on how likely it is to be patented and an accountant to discuss what the tax benefit might be, including possible R&D claims. If you are happy with the prospects you can then work with the patent attorney to start the process of applying for a patent.

Determining the tax benefit from the patent box is not a simple exercise, particularly when the patentable innovation is included as part of a wider product or service. However, as IT advances can qualify, the potential tax benefits are significant and, with the rules coming in shortly, now is the time to look at how your company may benefit.


By Lindsay Manson and Terrance Turner

The EC has responded to the recommendations of the Basel Committee on banking supervision with the introduction of the CRD IV package.

The implementation of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) (together known as the CRD IV package (CRD IV)) will create a new regulatory reporting environment. CRD IV is the EC's response to the standards recommended by the Basel Committee on banking supervision, known as Basel III. The CRR includes changes to the Pillar 1 and Pillar 3 requirements which will be directly applicable to firms in the UK and will not be incorporated into the FSA handbook. Implementation will therefore take place via the introduction of a single European rule book for financial services. Those changes affecting Pillar 2 will, however, need to be incorporated into the FSA handbook. The CRD IV package also includes proposals on corporate governance and remuneration.

CRD IV will apply not just to credit institutions but to all investment firms that are currently subject to the CRD. While there are expected to be some proportionality considerations for smaller investment firms, full scope firms will be impacted by the full suite of reporting requirements to the extent they have the relevant exposures.


The objectives (as stated on the FSA website) of the CRD IV proposals are as follows.

  • Enhancing the quality of capital by:

–– increasing the quality and quantity of bank capital

–– emphasis on core tier 1

–– allowing deductions directly from core tier 1

–– simplifying capital structure (lesser tiers and removing


  • Strengthening capital requirements for counterparty credit risk resulting in higher Pillar I requirements.
  • Introducing a leverage ratio as a backstop to risk-based capital.
  • Introducing new capital buffers – capital conservation and countercyclical.
  • Implementing liquidity regime – net stable funding ratio and liquidity coverage ratio.
  • Introduction of harmonised capital ratios reporting (common reporting or COREP).
  • Better disclosure (reconciliation of the balance sheet to regulatory disclosure).

Key changes


The Basel III framework sets out a need for focus on higher quality of capital, and therefore there will be a revised definition of capital under CRD IV. This will mean a change in the treatment of deductions, in particular in relation to investments in other financial institutions and deferred tax assets.

The concept of tier 3 capital will be abolished. There will be two tiers of capital – going concern capital (tier 1) and gone concern capital (tier 2). Going concern capital allows an institution to continue activities and prevent insolvency, gone concern capital ensures creditors can be repaid in the event of the institution's failure. Within tier 1 capital there will be a split between common equity tier 1 (CET1) and additional tier 1, with a requirement that CET1 capital be the predominant element of tier 1 capital. There will also be requirements to hold additional capital buffers, which will be phased in.

The capital requirements for a limited license investment firm continue to be calculated by reference to fixed overheads and reference to various credit and market risks (albeit that fixed overheads are yet to be defined in the regulation).

While the overall capital requirement may not necessarily increase immediately, there will be a requirement to hold more in the form of equity via CET1 capital. There will be a number of capital ratios which will determine the type of capital a firm may hold in order to meet its requirement.

There is currently no reference to partnership capital within the definition of CET1 capital although it is anticipated this will be addressed.

Credit risk calculations

There is no equivalent of the simplified, standardised approach under CRD IV.

Corporate governance

The Basel Committee and EU Commission concluded that, in many cases, the risk oversight by boards was inadequate and that boards were not involved enough in risk strategy. The new directive will therefore include binding regulations to ensure strengthening of the corporate governance framework (including increasing the effectiveness of risk oversight by boards, improving the status of the risk management function and ensuring the monitoring by supervisors of risk governance). There are a number of new requirements, including that all firms are to have a risk committee, although the FSA will have the power to waive this requirement on the grounds of proportionality.


Under CRD IV, COREP will become the prudential reporting framework for all firms currently regulated under BIPRU. The full set of templates for reporting is available on the European Banking Authority's (EBA) website. The expected changes to current FSA reporting under the new reporting system, according to the consultation paper released by the EBA, are detailed in the table. The COREP framework for reporting overlaps with the current reporting requirements under FSA003, and this will be reported quarterly. The FSA will have the power to collect additional data more frequently, and therefore some monthly reporting on capital to the FSA may remain. Whether the FSA003 would remain in its current form is unclear.

eXtensible Business Reporting Language

Under CRD IV the EBA intend to introduce European wide eXtensible Business Reporting Language (XBRL) taxonomies which will then be used to collect all regulatory data reported under CRD IV. The timeframe for this will be driven by the EBA. The FSA is currently considering the use of XBRL for reporting for firms outside the scope of CRD IV, but this will not be implemented before a consultation has taken place.

Timetable for implementation

In the original EC proposal in July 2011, the date for implementation was 1 January 2013. As this legislation has yet to be adopted by the EU it appears that this date is not practical. While no alternative date has been given, the FSA has released a statement that they are "proceeding with the necessary preparatory work to be ready to begin collecting data under Common Reporting for the period beginning 1 July 2013, should the legislation and related standards be finalised by this date."

Data items replaced by CRD IV at Jan 2013*

Data items under discussion

Data items unaffected by COREP

FSA001 Balance sheet**

FSA002 Income statement**

FSA015 – Sectoral analysis

FSA016 – Solo consolidation

FSA017 – Interest rate gap

FSA018 – UKIGs large exposures

FSA028 – Non-EEA sub-groups

FSA001 – Balance sheet**

FSA002 – Income statement**

FSA003 – Capital adequacy

FSA004 – Credit risk

FSA005 – Market risk

FSA006 – Market risk (supp.)

FSA007 – Operational risk

FSA008 – Large exposures

FRA045 – IRB portfolio data

FSA046 – Securitisation

FSA058 – Securitisation

FSA014 – Forecast data

FSA019 – Pillar 2 questions

Non CRD: FSA029 – 042

Liquidity: FSA011, 047-055

Payment services:





*Some data elements from replaced items may be retained.

**May be replaced for some firms if/when UK adopts FINREP.

Source: FSA website.

Next steps

It is clear that for all firms currently regulated under the existing CRD these changes will make an impact. While there is some scope for proportionality to be considered for limited license firms in the new regime, all firms should be considering the impact of these changes now. The consultation paper released by the EBA, CP50, should be read by all firms.

Our regulatory team will continue to monitor the developments and expected implementation dates. Should you wish to discuss how the new requirements may affect you please contact us.


By Christopher Springett

In our spring bulletin, we discussed the main advantages and disadvantages of operating a business via an LLP structure and a company. One advantage of the LLP structure is the improved availability of entrepreneurs' relief for owners, particularly those who hold an interest of less than 5%. This relief is not available through a corporate structure if the shareholder owns less than 5% of the share capital.

Due to the value of entrepreneurs' relief, it is worth revisiting this complex relief to consider when it may be available in both an LLP and a corporate structure.

What is entrepreneurs' relief?

Entrepreneurs' relief was introduced in Finance Act 2008 and provides a reduction in the rate of tax applied to a capital gain to 10% from a maximum of 28%.

The relief only applies to certain transactions where some fairly restrictive conditions are met. A lifetime allowance of £10m of gains on which the relief can be claimed applies for an individual.

For the relief to apply, the disposal must fall within one of three categories:

1. material disposal of business assets

2. disposal of settlement business assets

3. disposal associated with a relevant material disposal.

It is the first of these categories that is most often relevant for exit from a holding in a company or an LLP. The third category can also be relevant where personal assets are used in the business but this is not considered further within this article.

The rules for material disposals to qualify for entrepreneurs' relief are strict and must be met in full either:

  • for a period of at least one year ending with the date of disposal (whether shares in a company or an interest in an LLP); or
  • in the case of a shareholding or an asset used in a business, a one-year period to the date of cessation of trade if that date is within three years before the date of disposal.

Application of entrepreneurs' relief to a holding in a company

For a shareholding in a company to qualify for relief, the following conditions must be met throughout the required one-year period.

  • The company must be a trading company or holding company of a trading group. A trading company is one carrying on trading activities where non-trading activities are not carried on to a substantial extent.
  • The individual holding the shares must be an employee or officer of the company or of another group company.
  • The company must be the individual's 'personal company' being a company in which the individual holds at least 5% of the ordinary share capital and can exercise at least 5% of the voting rights by virtue of that capital.

A relaxation of the 5% rules is proposed for those acquiring shares on exercise of enterprise management incentive (EMI) options on or after 6 April 2012 provided the other conditions are met. However, for those not acquiring through an EMI, it is the requirement for a 5% shareholding that can cause issues for many holdings in a company especially where ownership is spread across a large base of shareholders.

Application of entrepreneurs' relief to an interest in an LLP

As there is no shareholding involved in an LLP interest, a material disposal of an interest in an LLP does not require a minimum level of holding. Neither is there a requirement to be an employee or officer.

A member of an LLP is treated as if they are in business on their own account. This allows entrepreneurs' relief to be claimed where the member disposes of the whole of their interest in the LLP by treating it as a disposal of the whole of the business. Equally, disposal of part of the interest in the LLP would be treated as disposing of part of the business and so would also qualify, whatever the level of interest held in the LLP (in contrast to a shareholding where the minimum 5% holding must be in place for the relief to apply).

The rules remain complex. As for shareholdings, the relief for interests in LLPs is limited to those that undertake a trade, profession or vocation. Relief is also restricted to the disposal of 'relevant business assets', as defined.


The fact that the member of the LLP need not hold a 5% interest in that LLP can open up the availability of entrepreneurs' relief to a wider number of business owners than in a corporate structure.

For the same reason, tax-efficient exit over time may be planned more flexibly from an LLP than from a company. Entrepreneurs' relief on exit from a company may potentially not be available on the final rounds of disposal where the shareholding has fallen below 5%.

Conversely, the restriction to relief for gains on relevant business assets for LLP holdings could make the corporate route more attractive where the business holds assets that may not meet this requirement but which would not be 'substantial' when considering the company's trading status.


By Martin Sharratt

The VAT position of financial advisers is becoming clearer It appears that HMRC and thefinancial services sector arebeginning to see eye-to-eye.Martin Sharratt examines thechanging VAT status of IFAs.

After many months of debate, and two important decisions by the courts (Bloomsbury Wealth Management at the Tax Tribunal and Deutsche Bank at the CJEU), it seems that HMRC and the financial sector have moved a little closer to understanding one another. At least, the position of a financial adviser post-retail distribution review (RDR) is becoming somewhat clearer.

The guidance notes produced by HMRC, and more recently the Personal Finance Society, don't cover every possible action by an IFA, but the big picture is now clear. HMRC accepts that where an adviser arranges for an investor to buy shares or units in a selection of collective investment schemes, such as unit trusts or open-ended investment companies (OEICs), this constitutes an exempt intermediary service and any advice supplied (e.g. in selecting the funds) is ancillary to that service. Although the adviser's marketing materials may use terminology such as 'wealth management' or 'investment services', the day-to-day management of the client's funds actually takes place within the collective investment schemes and is provided by the fund manager and not (or not normally) by the IFA. This point was at the heart of the Bloomsbury decision.

HMRC has also accepted that the same principle can extend to the 'ongoing services' offered by a typical IFA; these may look at first glance like a form of investment management, but in most cases they will consist of periodic reviews of investment performance and market risk, with a view to rebalancing and/or topping up the portfolio. (In the Bloomsbury case the reviews were provided on a quarterly basis.) As long as it is clear from the documentation that this is the extent and the purpose of the ongoing services, they too will be accepted as exempt intermediary services.

Services of this kind can usually be quite easily distinguished from those of a discretionary investment manager, which the CJEU confirmed in the Deutsche Bank case as being subject to VAT. Discretionary investment management (DIM) is a bespoke, handson service, in which the manager has an obligation to keep the portfolio under more or less constant review and to take action to improve the results. DIM services clearly include the buying and selling of shares, but according to the court the dealing service is ancillary to the investment expertise – even if charged for separately. This aspect of the case has caused some concern in the UK, where separate dealing charges are normally exempted, and HMRC has been consulting with the industry on how the decision should be implemented here. HMRC has confirmed that any changes will take effect from a future date. It is not yet known whether all dealing charges under a DIM agreement will in future be subject to VAT, but it is clear that, going forward, a separate charge will not on its own be sufficient to justify treating the commission as representing a separate service.

It is possible that, as they adapt to RDR, some IFAs will look to enhance their client offering by making it more of a proactive, continuous service, in return for a higher fee. If they do that, then they will not be able to rely on the intermediary exemption (even if the investments are in collectives), because they will have changed the essential characteristics of their service. If they go too far in that direction, the IFAs would be competing directly with discretionary investment managers, which would put them in the taxable arena.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.