Although widely anticipated, the Chancellor’s 2014 Autumn Statement was silent regarding changes to the UK’s Patent Box scheme. Introduced by the current Government in 2013, an announcement was expected that new rules could be introduced aimed at restricting the scheme to apply only to patents directly resulting from research and development taking place within the UK. Such a proposal, already agreed between the UK and Germany, is incompatible with the existing Patent Box scheme and thus despite being omitted from the Autumn Statement a formal announcement can nevertheless be expected in due course as discussed in our previous article.
The Chancellor did, however, announce changes to another key scheme applicable to private sector research and development, namely research and development (R&D) tax credits. The Government will increase the rate of the ‘above the line’ credit from 10 per cent to 11 per cent and will increase the rate of the SME scheme from 225 per cent to 230 per cent, effective from 1 April 2015. In addition, the cash credit received by loss making SMEs will increase from 32.63 per cent to 33.35 per cent of all qualifying R&D expenditure from 1 April 2015. These increases in R&D tax credits are no doubt partly funded by a significant tightening up of the rules governing the types of R&D expenditure which qualify for the tax credits. From 1 April 2015, the costs of materials incorporated into products which are subsequently sold are not eligible for R&D tax credits. With this change, the R&D tax credits will become more targeted towards the actual research and development phase of product and technology development, rather than the production and commercialization stage. Effectively, to continue to be eligible for the tax credits, businesses will need to demonstrate continuing research and development on new products and technologies. The Chancellor also announced a streamlining of the application process for smaller companies investing in R&D, a measure which will hopefully make R&D tax credits more accessible to SMEs within the UK.
Other notable changes announced by the Chancellor include new rules surrounding Entrepreneurs’ Relief (ER). The Government will stop individuals and partnerships from gaining a tax advantage by transferring their businesses into a company they control, and then claiming Corporation Tax deductions for assets linked to the business’s reputation and customer relationships, thus preventing individuals from potentially extracting funds from a business at a 10 per cent tax rate rather than at income tax rates. The measures, outlined in the Finance Bill 2015, take effect from 3 December 2014. Furthermore, to better target the available tax reliefs, the government will exclude all companies substantially benefiting from government support for the generation of renewable energy. Alongside this, the Government will make it easier for qualifying investors and companies to use the tax-advantaged venture capital schemes by launching a new “digital process” in 2016.
Finally, and perhaps under the growing pressure of public opinion, the Chancellor set out plans aimed to ensure that multinational companies pay the right amount of UK tax. The so-called ‘Diverted Profits’ tax, heavily targeted towards technology businesses, is set to be applied at a rate of 25 per cent from 1 April 2015. However, a tax on global corporations will require international agreement, and whilst the OECD group of leading economies is currently in the process of seeking a global deal, the process is yet to be completed. Depending on what the OECD ultimately decides, the Chancellor’s plans may be subject to future change, as the diverted profits tax would in any case have to be consistent with the international consensus arising from the OECD work.
In conclusion, widely anticipated changes to the Patent Box scheme are yet to be announced, which potentially provides a degree of uncertainty for businesses considering relocating R&D to the UK. Whilst increases in the amount of R&D tax credits on offer are welcomed, the tightening up of the rules surrounding qualifying expenditure may in practice take credits away from businesses aiming to mass-market products based on a handful of R&D successes. However, new innovation will continue to be rewarded with tax credits and moreover at an increased rate from 1 April 2015.