Tax N2K

Future of R&D Tax Credits

I was asked by a client yesterday whether I thought the UK R&D tax credit system would be around for the foreseeable future?

I answered “Yes”. Here’s a summary of my current thinking:

  • James Dyson‘s Ingenious Britain Report, as commissioned pre-election by the Conservative party into re-energising the British economy, gave the UK R&D tax credit system a whole-hearted thumbs-up – in fact, he recommended that this valuable tax incentive should be further enhanced for innovative high tech UK small companies;
  • The Tories pledged to push forward with a planned review of the taxation of intellectual property this Autumn. The Coalition government is keen to make the UK tax regime one of the most competitive in the G20 and to do so demands a well structured and favourable tax framework for intellectual property – otherwise big multi-nationals look to move their prized assets i.e. their intellectual property (IP) to a more favourable tax jurisdiction and worse, our home-grown talent (- export value – jobs) can be tempted to follow suit;
  • The Autumn review of IP tax is also expected press forward on plans to introduce a new patent box to tax income derived from intellectual property at a lower corporation tax rate – a tax incentive already enjoyed by our Dutch neighbours for example, so it is good to see that UK resident companies should enjoy similar tax benefits in the near future;
  • Generally there appears to be a growing understanding and acceptance (echoed from all political parties: from Alistair Darling to George Osborne to Vince Cable) that the most viable opportunity for rebuilding a long-term sustainable UK economy is to invest in building first class hi-tech innovative and intellectual property rich companies that can export their valuable know-how globally. A recent Nesta report on Rebalancing the UK economy is well worth a read in reaffirming this perspective. In essence: we don’t necessarily have to make the stuff but we can develop the ideas, know-how and proprietary IP for global manufacturers, distributors and retailers to license and sell!

On the negative side:

  • there was a momentary concern in the final stages of the election that the Conservatives would drop the R&D tax regime if elected when they pledged to reduce the headline corporation tax rate and “simplify the corporation tax regime” – could this have meant the death of the R&D tax scheme and other valuable incentives such as capital allowances? (although this proved not to be the case in the Emergency Budget).
  • The Coalition government also put a stop to proposals to introduce a video games tax relief which appears at odds with a perceived overarching aim to focus entrepreneurs on building IP rich digital and technology businesses.

So there have been some wobbles but fingers crossed these are isolated lapses (as a side-note I really hope the gaming tax relief proposals get back on the cards very soon).

What are your thoughts on the future of UK Research and Development tax credits?

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Emergency Budget 2010: What it means for fast growth technology businesses

There was mixed news for fast growth technology and digital businesses in today’s Emergency Budget. Headlines were as follows:

Corporation tax rates will be cut from 21% to 20% for small companies ie those with taxable profits up to £300,000, with effect from 1 April 2011. Large companies will benefit from tax rate cuts from 28% to 27% in 2011 and a 1% decrease each year to 24% in 2015. A hugely competitive rate.

Capital gains tax for entrepreneurs was actually enhanced with the 10% effective CGT rate preserved under Entrepreneurs’ Relief and the lifetime allowance increased from £2m to £5m. It was disappointing that more was not done to extend the benefits of Entrepreneurs Relief to employees holding share options, many of whom will be taking a career risk sticking with fledgling startups (rather than taking ‘safer’ jobs) so they deserve to be rewarded like the founder shareholders.

New start ups in the north west will benefit from a national insurance contributions holiday for the first year of trading for the first ten employees. The scheme will run for 3 years and could save businesses up to £50,000. It will kick off in September this year but businesses started in the interim may qualify.

Capital allowances will be reduced to fund the above corporation tax rate with the Annual Investment Allowance for investment in say computer equipment and office furniture reduced from £100,000 to £25,000 from April 2012. There are further reductions for investment in fixed assets so businesses should seek to accelerate planned capital spend before April 2012 when the changes take effect.

VAT increases from 17.5% to 20% from 4 January 2011 should have minimal effect on most B2B businesses as the increased VAT rates should wash through in most cases. B2C businesses will be hit next year although a 20% VAT rate remains competitive globally.

R&D tax credits will be preserved which is great news and a review will take place in line with the Dyson review which may enhance the relief. Disappointingly the planned video gaming relief will be withdrawn – why this is the case is baffling to me as the video games industry is one in which we already have a competitive advantage and the likes of Canada already have such tax breaks.

A Regional Growth fund along with pressure on banks to lend to SMEs should assist in ensuring that businesses have much needed access to funding.

Overall, the Emergency Budget was positive for businesses with a clear plan for growth and stability over the next 5 years.

What’s your view?

Emergency Budget Wishes 2010

Letter to George Osborne MP regarding my wishes for next Tuesday’s Emergency Budget Speech:

Dear Mr Osborne MP,

Emergency Budget 2010

I appreciate that you have an extremely difficult job next Tuesday 22 June 2010 in delivering a Budget Report that seeks not only to balance the books over the longer term but to also avoid derailing any possible chance of an economic recovery in the UK in the short to medium term. No mean feat!

I ask that you place support for Enterprise and Business at the centre of your plans. In my view, this represents the only fighting chance we have of preserving jobs – so that people can keep on saving and spending – whilst generating profits and economic growth to keep the till ringing at the Exchequer with tax receipts for years to come (and so pay down our monstrous public deficit).

Central to this approach must be a “sleeves rolled-up” desire to discard with red-tape, bureaucracy and other hurdles to businesses getting on “with doing business” aligned with a clear vision and road-map of the UK as a great place to do business. This must be a long term plan backed with long term measures. No short term chopping and changing – we’ve had enough of this of late – as businesses want “certainty” so that they can plan for the future with the confidence that the rug will not be pulled out from under their feet anytime soon. (As an advisor, I agree that this would be nice too).

You have already set out in your coalition agreement that you will increase the rate of capital gains tax for individuals, however, I ask that you stick to your pledge to retain more attractive rates for investment in business assets and avoid implementing any cumbersome taper relief measures that cause wide-spread head-scratching. Keep it simple. In a similar vein, I ask that you withdraw the hideously complex restrictions on tax relief on pension contributions made by higher earners so that people can save for their retirement without having to navigate this minefield.

You have also expressed a wish to simplify corporation tax to make the UK one of the most competitive tax systems in the world. I wholeheartedly agree with this lofty goal but ask that you refrain from withdrawing tax incentives that have helped influence longer term business planning in a positive way such as R&D tax credits, enhanced capital allowances and the forthcoming patent income and gaming relief tax breaks. The UK’s highly successful entrepreneur and inventor, James Dyson, has called for the R&D tax credit to be retained and enhanced – although I question whether the relief should be aimed solely toward particular high tech sectors as Dyson suggests. Further, a recent report by NESTA points to recent findings that the fastest growing 6% of businesses generated 1/2 of the jobs created in the UK between 2002 – 2008 – what these companies had in common was a disproportionate tendency to be innovativeWe have the expertise to build innovative intellectual property rich businesses that become key exporters bringing cash into our country and you should seize this opportunity by demonstrating commitment via targeted tax incentives such as those noted above.

Capital allowances should continue to be used as a lever to encourage ‘greener’ investment and I would also like to see the Government implement tax-advantaged status for specific business parks or zones to encourage inward and internal investment in businesses spread across the UK. The increasing prominence and differential of London as a business centre compared to the rest of the UK regions needs recalibrating and such measures could help. This could also lead to much needed job opportunities in areas of high unemployment – particularly where painful planned public sector jobs cuts are implemented.

Given the substantial revenue raising potential of an increase in VAT rates, I can understand why this is likely to be a target for change. Most B2B businesses would suffer minimally from such an increase as they would pass on the cost in most cases, however, please be mindful of the pain likely to be suffered by UK retailers and customers alike. I would also ask that any planned phased increases take account of the administrative and labour costs of changing prices for each uplift and its timing (e.g. not over the Christmas busy season like your predecessors implemented please), if such an approach is ultimately planned.

Other matters I would like to see addressed include: no drastic cuts to the HMRC Time to Pay Arrangement which so many businesses have been relying on to spread their tax bills whilst the banks have been less willing to lend; a withdrawal of the planned 1% increase in Employer’s National Insurance contributions and some practical, workable solutions for married / civil couples to split their personal income tax allowances.

The above is just a handful of the sorts of changes I would like to see but my overall plea is that a long-term business friendly strategy is adopted that opens the door for new business start-ups, increased overseas inward investment and a supportive tax and business regime that gives every promising UK business a chance to flourish.

Please let me know if you have any questions.

Best wishes and good luck for next Tuesday.

Yours sincerely

Steve Livingston

Have I missed anything?

Tax measures in the coalition government agreement – what might they mean for you?

  • Personal allowance to be increased to help lower and middle income earners. The Coalition has agreed that there will be a substantial increase in the personal allowance from April 2011. The amount for those under 65 is currently £6,475.
  • The increase in the Employers’ National Insurance thresholds proposed by the Conservatives will go ahead, reducing the impact of the rate rise for employers. But the rise in the rate for employees of 1% from April 2011 introduced by the Labour government is expected to remain.
  • In the long-term the intention is that the personal allowance will be £10,000. This will be reached over several years.
  • The increase in the personal allowance is to take priority over cuts to Inheritance tax. The Conservatives in their manifesto stated that they wanted to increase the Inheritance Tax threshold to £1 million. The Liberal Democrats were against this, saying it would only benefit a minority.
  • The Conservative party wanted the personal allowance to be transferable between married couples. The Liberal Democrats have been given the opportunity to abstain from voting on resolutions on this matter which may arise in the Budget.
  • The two parties are looking at taxing non-business capital gains at rates similar or close to income tax rates, with exemptions for entrepreneurial business activities. The current rate is 18%, so a jump to 40% is more than double and some could face CGT at the new higher rate of 50%.
  • In addition, it is rumoured that the tax-free amount for capital gains before any tax is payable may be cut from £10,100. The Telegraph was suggesting the new tax-free amount would be £2,000.
  • There is speculation that the rate of VAT will increase from 17.5% to 20% to fund the tax breaks.
  • It was said in the Agreement that the earnings link for the basic state pension would be restored from April 2011 with a ‘triple guarantee’ that pensions would rise by the higher of earnings, prices or 2.5%.
  • The parties agreed that reductions could be made to the Child Trust Fund and tax credits for higher earners.
  • The Conservative party said that Stamp Duty Land Tax would be scrapped indefinitely for purchases up to £250,000 by first-time buyers.
  • The Home Information Packs are to be scrapped but energy performance certificates will still be required.
  • The coalition has agreed to end the rules which make it compulsory to buy an annuity on reaching 75.
  • The Liberal Democrats said that they would give only basic rate relief on pension contributions. The Conservatives did not give any promises on pensions’ tax relief.
  • On corporation tax the Agreement is silent. However the Conservative manifesto states the intention to cut the main rate of corporation tax to 25p (from 28p) and the small companies’ rate to 20p (from 21p). This is to be funded by reducing complex reliefs and allowances [we should hear more on this in tonight’s CBI speech given by the Chancellor, George Osborne.]

What might this mean for you?

There are fears that some of the changes (e.g. the capital gains tax (CGT) hike) will be introduced with effect from the Emergency Budget Day (22 June 2010) – changes to CGT are usually left until 6 April of the following tax year but it could be that this will not happen in this case :(

Action:

You should review whether any non-business assets that you own (e.g. listed shares – not AIM) stand at an unrealised gain and therefore whether they could be sold before 22 June 2010. The shares could be re-purchased by a spouse the same day e.g. if they are a long term investment (you can’t repurchase the shares yourself until 30 days after selling them). Alternatively, you could consider selling into an ISA if you’ve yet to max out your £10,200 allowance for the 2010/11 tax year.

Second properties are more difficult to plan for as even if they stand at a current unrealised gain (doubtful in most cases!), the chances of offloading for a decent price pre-22 June 2010 is minimal, without risking taking a huge cut in price (which kinda defeats the object if the loss suffered outweighs the tax saving!). There is more complex tax planning that can be undertaken to overcome this practical issue with professional advice (from the likes of us).

Other areas at risk:

  • Higher rate relief on pensions could be withdrawn and replaced with basic rate tax relief for all.
  • Higher rate tax relief on Gift Aid payments.
  • Capital allowances….?

The above is based largely on speculation and could be proved wildly incorrect come 22 June 2010. Take professional advice specific to your circumstances before you take the plunge and do anything you weren’t otherwise planning to do in advance of the Budget Day – you shouldn’t allow tax to drive your investment decisions in any case. You have been warned…

Capital Allowances for fixed asset expenditure – a brief recap!

capital intensive shirt

[Note that much of the information below has since changed following subsequent announcements – please check more up-to-date posts]

A raft of tax changes is expected to be announced in the emergency budget scheduled for 22 June 2010 including potential changes to tax relief on capital expenditure – such tax relief is referred to as “capital allowances” in the UK tax code.

“Capital expenditure” means expenditure on fixed assets such as laptops, PCs. equipment, furniture, cars, vans etc, generally anything that you buy and intend to use for at least a couple of years in your business.

So if I spend £1,000 on a new laptop for my business, I would receive tax relief in the form of capital allowances rather than deducting the cost directly from my profits in the year.

The Conservative Party has previously expressed a wish to “simplify” the corporation tax regime and therefore the elimination of the wide and varied tax system of capital allowance reliefs could be a drastic yet possible option.

In the meantime, let’s recap on where we are now for UK capital allowance purposes (so you can see how simple it already is :)):

  • Annual Investment Allowance – this will cover the majority of annual capital expenditure for most UK businesses. The annual investment allowance (or ‘AIA’ as us tax folk affectionately call it!) was increased from £50,000 per year to £100,000 with effect from April 2010. So pretty much any capital expenditure incurred (except buildings and cars) gets allocated to the AIA and you get 100% tax relief in year one. You only get one AIA to spread amongst the group if there’s more than one company. AIA applies for companies, partnerships (be careful who the partners are) and sole traders.
  • Enhanced Capital Allowances (or ECAs – see what we did there again?!?). Good if you can get them as ECAs attract 100% tax writing down allowance in year one plus if the company is loss-making in the year and purchases qualifying ECA assets then the company can claim a cash tax refund from HM Revenue & Customs. Qualifying assets include water conservation kit and certain plant & equipment that reduces CO2. You can find the precise list of qualifying assets at www.eca.gov.uk. Certain cars also qualify for ECAs – those with CO2 emissions less than 110 g/km (at the moment although this keeps being revised downwards).
  • Short Life Asset elections (‘SLA’) – ideal for assets purchased which are scrapped or sold (for not a lot) less than 5 years after acquisition. Speeds up tax relief compared to the General Pool (see below). Downside is that the tax calculations and monitoring of each asset can become hideously complex and time-consuming plus it does not apply for cars or buildings.
  • General Pool – anything over and above the AIA, ECA, SLA pools get allocated to the General Pool. Try to minimise the amount that gets allocated to the General Pool as relief is slooooow – typically about 20+ years to get full tax relief even if you trashed that pc some 18 years earlier. (Trash being the operative word!). Tax relief in the General Pool is received at a rate of 20% reducing balance hence its lack of speed of relief. Best avoided where possible – ideally with a bit of nifty tax planning.
  • Special Rate Pool – don’t be fooled by the name! Its not special in a good way – although it has at least opened the door for tax relief on more assets than was available before its intro in 2008 – as tax relief is obtained at just 10% reducing balance (who knows where we’ll be by the time you get full relief under this….!). Aimed primarily at integral features within buildings (e.g. lighting, elevators, air con, lifts etc) it also includes ‘naughty’ cars (see below).
  • Cars – used to have their own regime (for cars costing more than £12,000 bizarrely being referred to as ‘Expensive Cars’!) and still do to an extent although they are being subsumed within the above capital allowance classifications based on the specific CO2 emissions. So the ‘good’ cars with low emissions get 100% relief; the middling cars get General Pool treatment at 20% and the bad boys get 10% relief in the special rate pool.
  • Buildings – nowt, nada, nothing, diddly-squat. Gordon Brown pulled the plug on Industrial Buildings Allowances (‘IBAs’) in 2006 with relief being phased out by 2011.

So there it is – a whirlwind tour of UK capital allowances as they stand today. No sooner than you’ve digested this, I fear that George Osborne will stand up on 22 June 2010 for his Budget announcement and either scrap most / all of it or at the very least tinker (they can’t help themselves!).

Welcome to my world…..

(P.S. If you feel that a ‘capital intensive’ t-shirt would be apt for your loved one or little bundle of joy then click here!)

Should I set up a Limited company for my new start-up?

Most business start-ups tend to opt for setting themselves up as a limited company from day one – but is this right?

Answer: It depends.

In many cases, a limited company is the right option but it pays to think through all the options as there can be benefits to thinking a little differently.

You basically have 3 main choices in the UK:

  1. Company
  2. Partnership
  3. Sole trader

The main advantage of a limited company is the limited liability status. This means that the company’s liability to a claim made by say an aggrieved supplier is limited to the share capital of the company. So if the company is set up with £1 share capital – that’s the extent of its liability. Hardly worth pursuing so the shareholders can sleep at night.

Limited liability status is not only important to protect the livelihood of the company owners but it is also useful for protecting valuable assets like trademarks, patents, know-how and other intangible assets.

But a company is not the only business vehicle that can attract limited liability status. Partnerships can also now attract limited liability status as an LLP (Limited Liability Partnership).

Why consider setting up an LLP over a company?

The key issue is flexibility. LLPs are more flexible than companies, particularly in relation to tax planning.

Consider the example of Jane & Freddy. J & F are starting a digital advertising agency. Rather than opting for the typical default option of a limited company, they set up an LLP at Companies House. J & F are partners in the LLP rather than shareholders and directors of a company. J & F pay income tax under Self Assessment rather than PAYE. They don’t pay any income tax until 31 January in the year following the coming 5 April tax year end. So they can diligently set aside this tax and keep it stashed in say a high interest cash ISA or bank account until it is due to be paid to HMRC. This compares with paying tax over monthly under PAYE.

But it gets better. There is no Employer’s National Insurance (currently 12.8% – potentially set to increase to 13.8% from 5 April 2011) on partners’ income from the LLP. Plus partners(and sole traders) are subject to Class 2 and 4 National Insurance which is more favourable than company Class 1 National Insurance. If they have taxable benefits such as company cars then there is also more favourable tax treatment in an LLP than in a company.

And yes…. it gets even better. After 2 or 3 years of successful trading, J & F may decide to incorporate their LLP and turn it into a company. (This might particularly be the case if they feel they have reached the stage where they need external investor funding in return for shares in their company.) The digital advertising agency business and its assets (e.g. computers, cash in the bank etc) would be transferred to the newly formed company at market value. This would crystallise a capital gain based on the market value of the business – however, this tax can be deferred.

The market value of the LLP business would be measured not only on the tangible assets transferred but also more interestingly on the intangible elements of the business, particularly goodwill (which may account for most of the value in the business). Goodwill is made up of the value in the brand, the customer base, its future potential etc built up over the past 2 or 3 years of trading – the factors that would influence a willing hypothetical purchaser to pay over and above the value of the visible tangible assets.

Post transfer, J & F Ltd would be the proud owner of the digital agency business and assets. The goodwill element would attract valuable tax relief in the company. Also, in return for the value transferred in, the company would have a debt owed to J & F as LLP vendors and now shareholders. This creates a highly valuable and flexible tax-free balance that can be drawn down as and when needed by J & F. Combined with a carefully managed remuneration extraction strategy from the company, J & F will have added considerable after tax value to their business which they can enjoy now compared to if they had followed the herd and set up as a company from day one – all by thinking a little bit differently.

The purpose of this short article is to emphasis that there are alternatives to setting up a company for a new business venture. It is oversimplified and the key benefits and principles may change (e.g. in light of the imminent emergency budget!) so, as ever, please take professional advice specific to your circumstances.

Tax Simplification – There’s a long way to go!

See the latest edition of UK tax legislation on my desk. It runs to over 21,000 pages –  this does not include the recently published Finance Act 2010!

So if your tax advisor ever says

“….well, its not quite that simple….”

in response your straightforward question or otherwise perfectly logical suggestion, hopefully this well help you understand a little better why.

Tax needn’t be taxing – yeah right!

Conservative Manifesto – What does it mean for your business?

“Our ambition is to create the most competitive tax system in the G20 within five years.We will restore the tax system’s reputation for simplicity, stability and predictability.”

David Cameron and the Conservative Party launched their manifesto for the impending May 2010 election today.

So what were the key points for business?

  • Emphasis is made of (re)introducing a simplified, more stable and certain tax regime. There is little doubt that small and large businesses alike are confused by the levels of bureaucracy and red-tape mixed with constant meddling in the UK tax system of late. An intention to introduce stability and certainty must be welcome. Mention is made of introducing an Office of Tax Simplification – did I just say plans to reduce bureaucracy……?
  • Tinkering with the planned increase in employer’s National Insurance – there appears to be a white elephant in the room here. Everyone seems to have been caught by the Tories’ proposed abolition of this “tax on jobs” when in fact the manifesto does not propose to abolish the 1% increase due in April 2011 but instead to tinker with the relevant income thresholds to make it apply to less employees and employers than would previously be the case – did I just say less meddling and increased simplification….?
  • Reduction in the standard rate of corporation tax for companies from 28% to 25%. Small companies rate to be cut from 21% to 20%. Further cuts to follow. But how will this be funded? By simplification – if so, what does this mean for the future of capital allowances for expenditure on fixed assets like plant and equipment….? Is the end nigh?
  • One year tax holiday from employer’s National Insurance for the first 10 employees of start-ups during the Conservatives’ first 2 years in Government
  • Research and Development tax credits (R&D tax credits) will be improved and refocused on hi-tech companies, small businesses and new start-ups.  Pretty much verbatim out of Dyson’ report as commissioned by the Tories – will the increase from 175% to 200% tax deductions be implemented….?
  • Cut red tape to enable businesses to be started quickly. A one-click registration model for new businesses rather than sifting through endless forms. Sounds interesting –  we await the detail.
  • £2,000 bonus for every apprentice hired by SMEs
  • Increased accessibility for SMEs to public sector contracts
  • No mention of VAT….?
  • Little mention of headline income tax rates….?

Is this enough support to help your business?

TIGA targets tax incentives to position UK Games Industry at the leading edge

TIGA, the trade association supporting the UK Games Industry, has launched its manifesto in readiness of the incoming governing party – whoever that may be from 6 May 2010?

Key proposals include (in my preferred order):

  1. Introduce a Games Tax Relief “as soon as possible” – we know it should be coming as it was announced in the recent Budget yet the exact details have yet to be revealed. The key point here is that other competing countries such as Canada, Australia. China, France and South Korea already receive support – we cannot allow this to drag on without concrete detailed proposals and an imminent timetable for its introduction. TIGA suggest that the relief should apply to any company subject to UK corporation tax so long as certain cultural tests are satisfied. They go on to suggest a series of tiered reliefs dependent on spend incurred in development of the games and the entitlement to a tax credit for qualifying companies. My concern is that efforts to make this as targeted as possible actually result in a more complex and burdensome regime that does not reach those UK gaming businesses that need it. I wonder whether a tax holiday system may be easier to implement?
  2. Increase the enhanced R&D Tax Credit to 200% (from 175%) for SMEs (Small and Medium Sized entities – basically those with less than 500 employees). I think this is right.
  3. Introduce the (lower 10% corporation tax) patent income regime as soon as possible. Like the Gaming Tax breaks, we know this incentive for patent income is on its way, TIGA quite rightly call for it to be introduced in 2012 rather than 2013 as currently proposed. The Netherlands have this now – why do we need to spend years consulting with businesses on this issue?
  4. Increasing the value of corporation tax losses – allow for corporation tax losses to be carried back 3 years to offset against previous years’ taxable profits rather than the current 1 year. There has been a temporary measure to allow a 3 year carry back but this extension has been limited to £50,000 of losses. I think this is a sensible proposal that would return us to the position we were in some 10 or so years ago.
  5. Extend the scope of Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) tax enhanced investing to include those businesses that fund rather than actually create intellectual property (IP). Given that IP will become increasingly valuable going forward, this makes sense.

Given that the UK Games sector contributed approximately £1 billion to the UK’s GDP and £400m in taxes to the Exchequer  in 2009, the Government should sit up, listen and take action.

You can download a copy of the TIGA manifesto here. Please leave your comments and thoughts.