© 2013 Grant Thornton UK LLP. All rights reserved. Tax planning for SMEs Corporation Tax: R&D relief and Patent Box June 2013 John Foskett Associate Director

© 2013 Grant Thornton UK LLP. All rights reserved.

Tax planning for SMEsCorporation Tax: R&D relief and Patent Box

June 2013

John FoskettAssociate Director [email protected]


Overview

Research & Development Tax Relief• What is Research & Development Relief?• Qualifying criteria• The benefits• Obtaining the benefits

The Patent Box Regime• What is the Patent Box?• Qualifying criteria• The benefits• Obtaining the benefits• Anti- Avoidance


Research and Development Tax Relief


Research and Development Tax Relief and Credits

• A government measure to incentivise companies to invest in R & D activities by allowing the claim of relief on qualifying costs

• Applicable to a variety of sectors:-– Pharmaceutical– Medical products– Manufacturing– Engineering– Automotive– Construction– Software


Research and Development – The Qualifying Criteria

• "A project must seek to achieve an advance in science or technology … through the resolution of scientific or technological uncertainty"

• This means "an advance in overall knowledge or capability in a field of science or technology (not a company's own state of knowledge or capability alone)"

• A project which seeks to make an appreciable improvement


Large SME• staffing costs• externally provided workers• consumable items includes water

fuel and power and computer software• subcontracted expenditure

Categories of Qualifying Expenditure


Small or medium enterprise - definition

An SME company meets the following tests:

1. Number of employees ≤ 500 and

2. Turnover ≤ €100m or

3. Balance sheet total ≤ €86m.


The Benefits

• Tax relief for companies with an R & D spend that are undertaking a qualifying R & D activity.

• 225% relief for expenditure incurred on or after 1 April 2012 by SME's and 130% for large companies.

• 100% allowance for R & D capital expenditure.


The Benefits

• Additionally, SME's can "trade in" their R & D capital losses and receive 25p for each £1 spent on qualifying R & D from 1 April 2012

• Government becoming increasingly generous reflecting its intention to support knowledge economy


Further issues/benefits

• No minimum spend

• Routine work may be allowed (part of wider project)

• Production costs

• Agency workers

• No PAYE/NIC cap for SME companies

• Above line credit for large companies (enabling a 'trade in' similar to that for SMEs) from 1 April 2013


Obtaining Benefits

• Any claim for R & D relief must be made in a Company Tax Return or amended return

• Must be made within two years after end of the relevant Corporation Tax period

• Ensure identification of all R & D activities within company

• Review commonly missed areas of claim

• Ensure understanding of latest changes in R & D


The Patent Box


Overview

• ''Encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK'' HM Treasury

• "To create the most competitive corporate tax regime in the G20"

The Coalition Government


The Qualifying Income

• Sales of patented items or "sale of products incorporating a patented invention"

• Licence fees or royalties from qualifying IP

• Income arising on the sale of patents

• Income arising from infringement of IP rights

• Notional arm's length royalty income for using qualifying IP in a process or services


The Benefits

• Allows companies to apply a lower rate of Corporation Tax earned on profits after 1 April 2013 from its patents

• An effective 10% tax rate by 2017


Obtaining benefits

• Elect in via corporation tax return.

• Relief to be phased in from 1 April 2013 ….

…. with full benefit from 1 April 2017

• Relief available for patents pending in year granted.

• Complement effect of R&D claims.


Targeted Anti-Avoidance Rules (CTA 2010, ss 357 F – 357 FB)

1. Superfluous exclusivity

2. Superfluous patents in products

3. Schemes to obtain a tax advantage by:– Avoiding the operation of a provision– Avoiding recognition of income– Obtaining a mismatch between income and expenditure


How can Grant Thornton help?

R&D tax credits• Identify qualifying projects• Assist in the preparation of claims• Help maximise your claims

Patent box• High level assessment of potential benefit/forecasting the

impact of the regime• Advice on record keeping• Assistance with valuation advice


Questions

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Tax planning for SMEsEmployment Tax: Current issues and opportunities

June 2013

Sharon GilkesAssociate [email protected]


• Outline the 'updated HMRC approach to employment tax compliance'

• Highlight the current HMRC employment tax 'Hot Topics' of review

• Identify areas opportunities to reduce costs and administration

Objectives


The importance of employment tax

• Sizeable proportion of total costs

• Complex regulations can lead to mistakes

• Can cause issues with Trade Unions and employees

• Damaging when things go wrong


Updated HMRC approach to employment tax

• Increasingly proactive

• New focus from dedicated teams who review specific issues (hairdressers, plumbers, legal firms, NHS)

• Existing agreements and assumptions

• Reviewing publicly available information


Employment tax 'Hot Topics'

• Real Time Information

• Employment Status

• Expenses - reporting

• Termination Payments


Real Time InformationManaging the impact of RTI

• Review payroll processes and policies to ensure the correct information is submitted to HMRC on time

• Undertake PAYE review and consider tax and NIC treatment of contentious payments e.g. termination payments, mileage payments

• HMRC now have unprecedented access to data when assessing PAYE and NIC compliance

• Targeted reviews will lead to prompted disclosures and penalties

• 'Light Touch' penalty regime for year one


Employment Status

• Based on case law principles - not a matter of choice• Consultants, Office Holders, Sub contractors• Review contractual arrangements and payment arrangements• Important factors taken into account in determining employment status

- Right to control - When, Where, How and What

- Financial Risk – operating as a true business

- Invoice/Payment terms - fixed price, expenses included

- Right of substitution - unqualified right/practical implications

- Part and Parcel of the organisation - desk, Christmas party!

- Work for other clients• Employment status framework and decision tree


Employment Taxes policies

• Form P11D Dispensation- Agreement with HMRC to ease reporting on forms P11D for specific

non-taxable expenses and benefits - Reduction in administration- Reduction in likelihood of Forms P11D penalty

• Pay as You Earn Settlement Agreement- Agreement with HMRC to account for tax and NIC on expenses and

benefits provided to employees- Utilise Trivial Benefits concession

• Expenses and Benefits policy- Written policy of business expense claim procedures- Manage internal cost control and tax/NIC leakage


Expenses – Income tax and NIC reporting

How should the expenses be reported?

Expense

Business Non-Business

Covered by dispensation

Not covered by dispensation

Not reporting P11D

Cash/credit card/pecuniary

liability

Employer meets expense

PAYE/P11D Class 1 NIC

P11D Class A

No Class 1A Tax Relief via self assessment

PSA


Termination payments

• Challenging economic times - relentless press coverage

• Availability of the Income tax and NIC exemption - S401

- Redundancy - do the facts support redundancy

- Contractual payments - holiday, bonus

- Payments in lieu of Notice - contractual/non-contractual

• Compromise Agreements and supporting documentation

- Critical Assessment of the termination and the payment(s)

- Mitigation of payments taken into account

• Take each element in isolation and apply correct tax and NIC treatment

Enterprise Management Incentives Scheme

What's new?• 12 month 'Qualifying Period' in order to benefit from entrepreneurs relief

will run from the date of grant of the EMI option rather than the date of exercise of the EMI option

• Shares acquired on exercise of the EMI option after 6 April 2013 will be able to qualify for entrepreneurs relief even if the individual does not hold 5% of the share capital

• Potential CGT rate of 10% and not 18% / 28%

Enterprise Management Incentive Scheme

Who will be affected?

Employees• EMI options now more attractive to employees• Potentially no income tax or NIC on grant or exercise and now subject to very

low rate of 10% CGT• 12 month holding period starts from date of grant of options for Entrepreneurs

Relief purposes.

Employers• No longer need to think about issuing options that are exercisable• 12 months before a potential sale in order for employees to access

Entrepreneurs Relief.• Corporation tax deduction on the amount of gain for employer still available• No employers NIC on exercise of option

Tax Efficient Benefits Using Salary Sacrifice

• Cost continues to be a major focus and likely to increase

• There is continued pressure on pay reviews

• Many employers are revisiting their benefits strategy in

order to generate employment cost savings

• Linking tax efficient benefits to a salary sacrifice could generate combined savings between 40% - 60% of the value of the benefit, with the benefit being self funded

• Employees would see a net increase in their disposal income and would benefit from the corporate buying power of the employer/benefit provider

What are the benefits of salary sacrifice?

Employer

• Opportunity to generate annuity savings

• Improve cost control• Enhance the internal and external

perception of the employer• Differentiate from or align with the

competition• Delivers attractive benefits to

employees at affordable prices• Improve recruitment/retention• Improve motivation/morale

Employee

• Saving in tax/NIC which increase take home pay and/or disposable income

• Attractive benefits at affordable price

• Ability to select benefits which meet personal and lifestyle needs

• Have access to a range of benefits at corporate rates

© 2013 Grant Thornton International. All rights reserved.

Example of savings generated by offering low CO2 emission cars via salary sacrifice

Example of employee earning £30,000 pa financing a BMW 118d from net pay, list price £19,800. This hasan annual cost to the employee of £5,398 but which could be obtained by the Company for £5,000 pa.

Salary £30,000

DeductionsTaxNIC

£4,379 £2,732

Take home pay £23,889

Car cost £5,398

Employee net £17,491

SalarySalary sacrifice adjustment

£30,000 £ 5,000

Revised actual pay £25,000

DeductionsTaxNICCar benefit charge

£3,379 £2,132 £ 712


Employee income increases by £1,286 and Employer NIC reduces by £199 (taking into account NIC dueon car benefit).Total combined savings exceed £1,485 per annum, which can be shared between the Employer and Employee.Rates used 2012/13

Before After

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Example of savings generated by offering Subsistence Allowance payments via salary sacrifice

Example of employee earing £25,000 pa who would be entitled to £1,175 in tax free subsistence allowance payments per annum based on 235 work days. Subsistence costs are currently being met by the employee from net pay after payroll deductions. Savings are shared as they arise

Salary £25,000

DeductionsTaxNIC

£2,112 £2,070

Take home pay £19,818


SalarySalary sacrifice adjustment

£25,000 (£1,175)

Revised actual pay £23,825

DeductionsTaxNICAdditionsSubsistence rate

£2,877 £1,929

£1,175


Employee net income increases by £376 per annum – equivalent to a 2.2% gross pay increase.Employer NIC /costs reduce by £162 per annum.Total combined savings £538 per annum.

Before After

Additional Potential Benefits

Other benefits which could be included which would provide employees with further flexible arrangements as well as generating savings for the employer as well as employees include:• Buying/selling holidays• Mileage rates (When cash allowances in lieu of car are paid)• Health screening• Training• Car parking• Professional subscriptions• Private medical/dental insurance• Mobile phones• Home computers• Life Assurance Cover • Income Protection/CI cover

Examples of how annual cost savings can arise from a range of benefits.

Opportunity Typical value per annum per employee

Employer savings per annum

Employee savings per annum

Pension salary sacrifice (100 employees earning £25,000 contributing 5%)

£150 £17,250 £15,000

Car parking (100 employees £5 per day)

£384 £16,500 £38,400

Low CO2 emission cars (100 employees)

£1,100 £20,000 £110,000

Subsistence(100 employees)

£432 £18,600 £43,200

Total savings £2,066 £72,350 £206,600


Questions


VAT and indirect taxes for SMEs

June 2013

Henry Cairns-TerrySenior [email protected]


VAT and indirect tax

• Registration and deregistration• VAT return cycles• Specific SME measures• Problem areas


VAT registration – compulsory registration

• Historic turnover test (rolling 12 month)– Value of taxable supplies in previous 12 months exceeds

£79,000– Notify within 30 days– Registered at end of month following

• Prospective turnover test (next 30 days)– Value of taxable supplies in next 30 days exceeds

£79,000– Notify within 30 days– Registered from beginning of the 30 days.



• NB the following when valuing turnover– exclude sales of capital assets– include turnover under previous ownership for

transfers of going concerns (TOGC)– margin schemes – margin, not headline turnover– certain supplies of long-term accommodation

can be excluded.



• Exceptions– prospective 12 month turnover below £77,000– substantially only zero-rated supplies


VAT registration – voluntary registration

• Voluntary registration– supplies below registration limit, but want to

register anyway, eg to recover VAT on purchases

• Intending trader registration– no taxable supplies yet, but entitlement to

recover input tax on 'preparatory acts'– irrespective of whether taxable supplies ever in

fact made


VAT registration – anti-avoidance

• Disaggregation– closely-related businesses artificially split– HMRC can issue direction to treat as single

taxable person


VAT registration – other forms

• Group registration:– bodies corporate under common control

• >50%• UK resident

– NB joint & several liability– Refusal on grounds of Protection of the Revenue

• Divisional registration– one company multiple divisions separately registered– no VAT on inter-divisional supplies– NB all divisions must be fully taxable


VAT registration - deregistration

• No further intention of making taxable supplies• Turnover next 12 months < £77,000• In either case:

– final VAT return– output tax on assets on hand if VAT > £1,000


VAT return cycles

• Quarterly staggers– March, April or May– business can choose, or automatically allocated

• Monthly returns if chronically in repayment position– or if within payments on account regime

• Worth modelling which format gives best cash flows

• NB special accounting periods where appropriate– must be agreed in advance


Specific SME measures – cash accounting scheme

• Turnover next 12 months < £1,350,000• Benefits

– automatic relief for VAT on bad debts– deferral of VAT on credit sales

• But– input tax can only be claimed on payment

• Certain supplies have to be dealt with outside the scheme, eg– goods bought/sold on hire purchase– acquisitions (EC) and imports (non-EC)

• NB can't be used with a flat-rate scheme


Specific SME measures – annual accounting

• Turnover next 12 months < £1,350,000• Benefits

– one VAT return per year (extra month to submit)– monthly or quarterly payments on account– balancing payment with VAT return

• Can also be used with a flat-rate scheme


Specific SME measures – flat-rate schemes

• Flat-rate scheme for small businesses– Turnover < £150,000 pa– Flat rates up to 14.5%, dependent on business– No credit for input tax, except

• Capital items costing > £2,000• Pre-registration input tax


Specific SME measures – flat-rate schemes

• Flat-rate scheme for farmers– Fixed rate VAT addition of 4% on agricultural

sales• not other supplies eg sales of equipment

– No credit for input tax– no turnover limit as such, but flat-rate VAT must

not exceed 'notional' input tax by > £3,000• never a problem below £75,000 turnover


Problem areas

• Partial exemption– Standard and special methods

• NB incidental transactions– Override provisions

• Standard method override• Special method override

– De minimis– Capital goods scheme


Problem areas

• Land & property – two VAT codes– Residential

• Dwellings• Relevent residential• Relevant charitable

– Commercial• Option to tax


Problem areas

• Staff expenses– Subsistence– Staff entertainment– Business entertainment


Problem areas

• Transactions and deal costs– Sell side– Buy side– HMRC challenges


Questions


Grant Thornton

John [email protected]

0121 232 5131

Sharon [email protected]

0121 232 5259

Henry [email protected]

0121 232 5173

mailto:[email protected]



Documents

© 2013 Grant Thornton UK LLP. All rights reserved. Tax planning for SMEs Corporation Tax: R&D relief and Patent Box June 2013 John Foskett Associate Director