Weekly Tax Briefing

Tax

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The Finance Act 2000 introduced a new definition of research and development expenditure for tax purposes; this covers activities which are treated as R&D under normal accounting practice, but with provision for specific activities to be included or excluded by regulations.

Under the Act, relief for 'research and development' expenditure replaced the previous relief for 'scientific research' expenditure - but in practice the same activities are covered. The new definition also applies in interpreting the term 'research and development' where it is used in stipulating the activities of a company which are permitted if relief is to be available under the existing provisions dealing with the Enterprise Investment Scheme and Venture Capital Trusts, or under the new provisions introduced by the Finance Act 2000 dealing with the Corporate Venturing Scheme, Enterprise Management Incentives, and 'R&D tax relief' for small and medium-sized enterprises. For corporation tax purposes the new definition applies to accounting periods ending on or after 1 April 2000; and for income tax and capital gains tax purposes to years of assessment from 2000/01 onwards.

On 28 July the Department of Trade and Industry published 'Guidelines on the meaning of research and development for tax purposes', intended to help businesses decide with greater certainty whether particular activities fall within the scope of the definition, and to provide guidance to the appeal Commissioners and the courts when they hear cases on R&D issues. (Previously these matters were decided by the Secretary of State for Trade and Industry.)

The guidelines reproduce the essential elements of the accounting definition, but provide greater detail by way of explanation and examples. In particular, they are intended to assist in delineating the boundaries of what constitutes R&D activity. They were given statutory force by the Research and Development (Prescribed Activities) Regulations 2000 which were made on 31 July and will have effect from 21 August 2000.

Neither the new definition nor the new appeal mechanism apply to the provisions for the approval by the Secretary of State for Trade and Industry of scientific research bodies, payments to which may be tax-deductible. These remain unchanged in substance.

The Irish Minister for Finance announced on 20 July that the income tax year, which currently runs from 6 April to the following 5 April as in the UK, is to be aligned with the calendar year with effect from 1 January 2002. A transitional 'year' will run from 6 April 2001 to 31 December 2001. Proposals for revised filing and tax payment dates have been released for consultation.

In his speech the Minister said, 'Using the calendar year will put the collection of income tax on a more rational and simplified basis. Combining this change with the Euro changeover will allow necessary changes to IT systems to be made in one go.'

From time to time suggestions are put forward for the adoption of a calendar year basis in the UK. The implementation of such a change in a neighbouring state with a similar tax system and the same current year end of 5 April will give a unique opportunity to assess the benefits and difficulties involved in such a move.

The somewhat unusual date of 5 April arises from the fact that, prior to 1752, the new year under English law began for most purposes on Lady Day, 25 March. When Great Britain adopted the Gregorian calendar in place of the Julian, the eleven days between 2 and 14 September 1752 were omitted. In order to avoid having a fiscal year of less than 365 days the year 1752/53 was extended by eleven days to 5 April. (This was, of course, before the days of income tax.)

Weekly Tax Briefing 2000-20 reported Government proposals to allow national insurance liabilities on the exercise of share options to be transferred from employers to employees, by agreement. The necessary legislation to permit this transfer is included in the Child Support, Pensions and Social Security Act 2000, and the Finance Act 2000 contains provisions to give the employee tax relief for the liability thus incurred. Both Acts received Royal Assent on 28 July 2000.

Regulations have been laid specifying the details which must be included in a Gift Aid declaration, and setting out the arrangements for paying the Government's 10% supplement on Payroll Giving donations.