UK: Financial Services And Markets Group Bulletin - Winter 2014/15

Last Updated: 13 February 2015
Article by Andrew Cunnington, Colin Aylott, Nick Randall and Chris Springett


By Andrew Cunnington

From 6 April 2015, the 55% tax charge will be abolished and individuals under the age of 75 on death can pass their 'defined contribution' pension fund to any nominated beneficiary. The beneficiary will then have the option of either continuing to draw an income (through a flexi access drawdown account) or receive the fund value as a lump sum but crucially, any payments they receive will be tax-free. However, this will not apply to defined benefit (final salary) pension schemes.

If death were to occur post age 75, any individual could still inherit the 'defined contribution' fund and draw an income subject to their marginal rate of tax, but if the lump sum option is selected, this will then incur a tax charge of 45%. However it is intended that from the 2016/17 tax year, the lump sum payment will also be subject to the marginal rate of the individual concerned.

This is a significant change on the current position upon death and will allow individuals to pass on their pension funds more tax efficiently to the next generation.

It will also have implications on wider financial planning strategy. The potential investment horizon for an individual's pension fund will become longer than may have otherwise been the case due to the ultimate tax charge which would have previously applied for those likely to access drawdown.

Those looking to undertake inheritance tax planning may well consider using their pension fund in a manner which was not previously possible, particularly if the ultimate beneficiary of a pension fund will be subject to income tax at a lower rate than that applying to inheritance tax.

As with all changes of this nature, the devil will be in the detail and advice should be sought from a professional.


By Colin Aylott

Many companies in the financial sector are still not claiming this hugely valuable tax relief, or taking its full benefit. This is often because they do not realise they are carrying out research and development (R&D), due to the complexity of the rules.

SMEs in the financial sector, including insurance made only 145 claims in 2012/13 (1.1% of the 13,000 claims), but had the third highest average claim of all sectors at £69,000, a substantial sum. We have made numerous claims for the relief for financial companies, in particular for software costs on innovative IT projects.

We thought it was worth reminding companies what R&D is all about.

What is R&D?

In the first instance, R&D is defined by reference to projects which seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones.

Only publicly available knowledge need be assumed, so that R&D may be undertaken even where similar development has been undertaken by a competitor, for example, 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.

What is it worth?

Where an SME is taxpaying, the extra relief can be worth up to almost 30% of cost, depending on the year the expenditure is incurred. This arises from an 'uplift' in deductible costs of 125%, proposed to increase to 130% from 1 April 2015.

Where an SME is lossmaking, the relief can give rise to cash repayments of over 32.5% of the cost, even where no tax has ever been paid. This is of considerable assistance to a start-up.


To qualify for the reliefs for SMEs, the company, together with appropriate proportions of any 'linked' or 'partner' enterprises, must have fewer than 500 employees and either a:

  1. turnover not exceeding €100m; or
  2. balance sheet total not exceeding €86m.

The definitions of linked or partner enterprises include, for example, companies owning 25% of the company or being 25% owned by the company.

Qualifying expenditure

Qualifying R&D expenditure must be revenue expenditure on:

  • employee and agency costs
  • software and consumables
  • subcontracted expenditure (for SMEs)
  • certain indirect expenditure.

In the case of agency costs, or subcontracted R&D, only 65% of the cost qualifies for this uplift unless certain elections are made.

Expenditure capitalised in the accounts is not necessarily excluded. If capitalised into tangible fixed assets, it might only qualify on a depreciated basis, if at all.

Making claims

There are numerous other rules, including the restriction that an R&D tax credit may only be claimed or paid where the company remains a going concern.

Finally, claims have to be made within two years of the end of an accounting period, and HMRC give no leeway here.


By Nick Randall

Following the exposure drafts issued in 2010 and 2012, the Financial Reporting Council (FRC) issued the final version of three Financial Reporting Standards (FRSs) which set out the future shape of UK financial reporting. The FRSs are:

  • FRS 100 Application of Financial Reporting Requirements
  • FRS 101 Reduced Disclosure Framework
  • FRS 102 The Financial Reporting Standard applicable in the UK and Ireland.

For periods starting on or after 1 January 2015, UK companies are now not permitted to prepare their accounts in accordance with previous versions of UK GAAP (substantively the FRSs, SSAPs, UITFs and relevant accepted practice in existence and applied prior to the introduction of FRS 100, FRS 101 and FRS 102). It is expected that for many entities currently applying current UK GAAP, they will transition to one of FRS 101 or FRS 102.

The Financial services and markets group bulletin, Autumn 2013, summarised a number of considerations for financial services businesses.

To view the full report please click here.

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. © Smith & Williamson Holdings Limited 2015. code: 15/088 exp:31/7/15

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