UK: Tax Focus – September 2014

Last Updated: 14 October 2014
Article by Tina Riches, Matt Watts and Colin Aylott

TAXATION SHIFTS FOLLOWING SCOTLAND'S 'NO' VOTE

Article by Tina Riches

Following the 'no' vote in Scotland, there is more clarity on the tax position, at least in the short term. Further powers for Scotland are being discussed so this may change. Under the Scotland Act, these changes will start to have an impact from April 2015, with the effects of at least some of the changes being felt not just in Scotland, but also the rest of the UK, often referred to now as 'rUK'.

However, until that happens, we summarise below the changes already agreed.

Property related taxes

The first two known tax changes are property related, due to come into force in April 2015. The new land and buildings transaction tax (LBTT) will replace rUK's stamp duty land tax (SDLT) on property transactions in Scotland. Whereas SDLT is a slab tax with the whole price taxed at one rate, LBTT will be a progressive tax. Like income tax, if the taxed amount is £1 over a threshold it is only the excess that will be taxed at the next rate, not the whole value.

The exact LBTT rates are due to be announced this autumn. It will be interesting to see if the changes invigorate the property machine, rather than cause a blockage at each rate rise threshold. There are fewer reliefs than under SDLT, but others are already being looked at, such as a sub-sales relief. LBTT will be supported by the Registers of Scotland, who already compile and maintain various registers.

The other new property related tax is the new Scottish landfill tax. Also due to start in 2015, this tax will be administered by the new tax authority, Revenue Scotland, with the operational support of the Scottish Environment Protection Agency.

Scottish rate of income tax

The other tax already on the statute book, although strictly not a devolved tax, is the Scottish rate of income tax (SRIT), due to take effect from 2016 on non-savings income of Scottish residents. This replaces the current ability of the Scottish Government to vary income tax rates, which has never been used.

SRIT will need to be operated by employers, pension or annuity providers operating PAYE. It will work by taking a 10% slice off UK income tax and instead adding on the SRIT set by the Scottish Parliament, which may be at a different rate.

There will be a number of implications, not least for employers or pension providers in rUK, who will also need to know which side of the border their employees or pensioners are resident. Much of this headache will be operated by HMRC issuing Scottish or rUK coding notices but systems will need to be put in place to cope with this.

Relief around pension contributions is proving difficult and there will be transitional rules until 2018.

Gift Aid for charities will continue to apply at the UK basic rate, regardless of the tax position of the donor, due to the administrative burden that any other system would have on charities. The UK Government will keep this issue under review.

The changes are known and potentially far reaching, particularly the progressive nature of LBTT and if SRIT is set significantly different from the 10% reduction noted above.

As also noted above, further changes are possible in the short term so watch this space.

CULTURAL TESTING FOR VIDEO GAMES IN FORCE

By Matt Watts

Legislation was introduced in 2013 giving tax relief for video games development. EU approval was needed before this measure could become effective and this was given, allowing the legislation to become effective for accounting periods ending on or after 1 April 2014.

The regulations, including the detail of the cultural test have been confirmed, and set out the information and evidence that applicants need to provide for the cultural test. The cultural test regulations came into force on 19 August 2014.

Consequently, relevant companies making video games can now claim tax relief subject to meeting the qualifying conditions.

One of these tests is that the video game needs to be sufficiently culturally British. A cultural test needs to be passed and requires the game to achieve a certain number of points based on the factors included in the test.

Points can be awarded in four areas as follows.

  1. The content of the game that relates to the UK or Europe, Europe being limited to EEA states.

    This includes:

    • where the video game is set. More points are awarded depending on proportion set in UK or EEA states;
    • the number of characters depicted in the game that are from the UK or another EEA state;
    • whether the game depicts a British story or a story which relates to another EEA state; and
    • the percentage of the original dialogue that is recorded in the English language or a recognised regional or minority language.
  2. Whether the video game represents or reflects British creativity, and British heritage or diversity.
  3. How much of the video game was developed in the UK. This covers matters such as conceptual development, storyboarding, programming, design, performing and recording any music score created for the video game, voice recording and audio production.
  4. The extent of involvement of nationals or residents of EEA states in the video game production. Persons taken into account are project leaders, scriptwriters, composers, artists, programmers, designers, heads of department and the development team.

All those in the video game sector should consider whether they qualify for this valuable relief. In brief, the relief allows for 100% additional tax deduction on qualifying expenditure, up to a maximum of 80% of overall expenditure. In loss making situations the enhanced deduction can be surrendered for a 25% payable tax credit.

ACTION IS REQUIRED TO LODGE CLAIMS WHICH CAN MEAN CASH BACK

By Colin Aylott

Thousands of businesses are missing out on valuable research and development tax breaks, which can provide a valuable source of working capital.

Many businesses are investing large sums into developing, for example, IT systems, but are unaware that they could qualify for these tax breaks. Expenditure on systems development is widespread and companies are missing out.

Some businesses can claim almost a third of qualifying R&D expenditure in tax credits which can provide a valuable source of working capital for businesses. This is a government-endorsed scheme which applies to businesses in any sector in any part of the country.

According to data recently released by HMRC, £1.4bn was claimed in tax relief on R&D during April 2012-13, the most recent year for which information is available. Tax specialists at Smith & Williamson analysed the figures and highlight sector and regional imbalances.

The number of claims in the finance and insurance, construction, real estate, arts and health sectors are particularly low. However the average of successful claims in these sectors has been among the highest, suggesting considerable scope for others in these sectors.

It is important to realise that there is a cut-off date. Claims must be submitted no later than two years after the accounting year in which the expense was incurred. For example, a company with a 31 December 2012 accounting year end can submit R&D tax relief claims for expenditure incurred in that year until 31 December 2014.

SMEs taking on work as sub-contractors are also eligible, although restrictions can apply. There are circumstances where the subcontractor restrictions don't apply and these may occur more frequently than is realised. Only 580 sub-contractors claimed in the 2012/13 tax year, suggesting that many in this category are also unaware of what's available.

SMEs can qualify for a higher rate of R&D relief than larger businesses, however, to qualify, businesses should employer fewer than 500 people, and either, an annual turnover of no more than €100m or a balance sheet not exceeding €86m.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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