Budget 2014: IP&IT implications

Practical Law UK Legal Update 2-561-6346 (Approx. 5 pages)

Budget 2014: IP&IT implications

by Practical Law IP&IT

Facts

George Osborne, the Chancellor of the Exchequer, delivered the 2014 Budget on 19 March 2014. The Budget included measures relating to the exclusion of research and development (R&D) allowances from the loss buying rules; the increase in repayable R&D tax credit for small and medium-sized enterprises (SMEs); and chargeable gains roll-over relief, which is to be denied for reinvestment in intangible assets.

For an overview of the key business tax announcements made in the 2014 Budget, see Legal update, 2014 Budget: key business tax announcements. For Practical Law's coverage of the 2014 Budget, see Practical Law 2014 Budget. Further content will be added to this page over the coming days.

Measures relating to the media and telecoms sectors are set out in Legal update, Budget 2014: Media & Telecoms implications.

References to "Overview" are to the HMRC / HM Treasury Overview of Tax Legislation and Rates published on 19 March 2014. References to "TIIN" are to HMRC / HM Treasury Tax Information and Impact Notes published on 19 March 2014. References to "HM Treasury: 2014 Budget" are to the Budget report red book published on 19 March 2014.

UK government position paper on BEPS

As part of the 2014 Budget, HM Treasury and HMRC have published a position paper on the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. This Action Plan proposes 15 Actions to be taken to strengthen international tax rules. For details of the Action Plan, see Articles, The OECD's Action Plan on Base Erosion and Profit Shifting and The OECD's action plan on BEPS: a taxing problem. See also Legal updates, OECD: draft guidance on transfer pricing documents and country-by-country reporting and BEPS: OECD discussion paper on preventing treaty abuse. The position paper sets out the approach that the UK government intends to take in developing the Actions. Notable IP and IT-related points from the paper include the following:

On Action 1 (digital economy), the government advocates consistent tax treatment between primarily digital companies and companies incorporating digital technologies into their businesses. The government supports work to update the threshold for taxation in a territory (permanent establishments) and transfer pricing guidelines, but will propose supplementary rules specific to the digital economy (for example, on the taxation of online advertising) if it thinks this necessary. (The OECD is due to publish a discussion draft on 24 March 2014, see OECD, BEPS/G20 Project: Calendar for planned stakeholders' input 2013-2014.)
On Action 5 (harmful tax practices), the government supports clarification of when a regime is considered to have substance as this will give certainty to legitimate regimes, such as the UK patent box rules (see Practice note, Patent box). However, the government stresses that businesses should continue to be able to operate in a legitimate way for commercial reasons, such as deciding where to carry out research and development, and notes that too heavy a focus on substance may lead the movement of jobs to tax havens. Finally, the government supports scrutiny of transparency around informal rulings that give rise to preferential tax regimes.
On Action 7 (permanent establishments), the government reiterates the need to update the rules to take into consideration modern business forms, particularly digital enterprises and the increasing importance of warehousing, and suggests introducing specific rules if necessary. The government also urges consideration of the particular needs of small businesses.

Chargeable gains roll-over relief denied for reinvestment in intangible assets

The legislation that permits the deferral of tax on chargeable gains on a disposal of business assets, the proceeds of which are invested in new replacement assets, will be amended to clarify that the relief is not available where, on a disposal of business assets by a company, the proceeds are reinvested in intangible fixed assets.

Part V of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) permits the tax charge arising on the disposal of business assets to be deferred where the proceeds of the disposal are reinvested in certain categories of replacement assets within a specified time period (see Practice note, Tax on chargeable gains: general principles: Rollover relief on replacement of business assets). Schedule 29 of the Finance Act 2002 withdrew this relief for disposals by companies, the proceeds of which were invested in intangible fixed assets on or after 1 April 2002. However, these provisions were subsequently re-written into section 156ZB of the TCGA 1992 and the re-written legislation created some uncertainty.

The government therefore proposes to introduce legislation in the Finance Bill 2014 to amend section 156ZB of the TCGA 1992, with effect from 19 March 2014, to put the position beyond doubt. It will also introduce legislation in the Finance Bill 2014, in the form of new section 870A of the Corporation Tax Act 2009, to ensure that, where roll-over relief has been claimed before 19 March 2014 on disposals in these circumstances, the cost of the replacement asset(s) will, for accounting periods beginning on or after 19 March 2014, be reduced to prevent relief from being given twice. For accounting periods that straddle that date, the periods before and after 19 March 2014 will be treated as separate accounting periods.

(See TIIN, Chargeable gains roll-over relief: reinvestment in intangible fixed asset, HM Treasury: 2014 Budget, paragraph 2.120 and Overview, paragraph 1.18.)

Exclusion of R&D allowances from loss buying rules

The Finance Bill 2014 will include legislation excluding R&D allowances (RDAs) from the loss-buying anti-avoidance rules in Part 14A of the Corporation Tax Act 2010 (Part 14A).

RDAs are available under Part 6 of the Capital Allowances Act 2001 (CAA 2001) for capital expenditure on R&D by a person carrying on a trade (section 439, CAA 2001). The relief enables a taxpayer to deduct 100% of the expenditure at the end of the chargeable period for which the allowance is made as an expense in calculating its income profits. For further details, see Practice note, Intangible property: tax: Capital expenditure. A person that has not yet started to trade may claim R&D relief as though they were trading, provided that the R&D is related to the intended trade. They are entitled to the relief (at 100%) as if they were carrying on a trade against which the expenditure could have been deducted. For further details, see Practice note, R&D tax reliefs: practical aspects: Not yet started to trade.

Part 14A aims to prevent companies from undertaking tax-motivated reorganisations to access deductions or making arrangements to transfer profits to access those deductions. More specifically, it aims to bring the tax treatment of unrealised losses more closely into line with the long-standing treatment of realised losses by restricting their set-off against other profits. There is an avoidance motive test so that the rules only apply if (one of) the main purpose(s) of the arrangements is to use the deductible amounts. For further details, see Legal update, Finance Bill 2013: targeted corporate loss buying rules.

Absent specific legislation, RDAs would qualify as deductible amounts falling within Part 14A. However, HMRC states that this has had a more significant adverse impact on RDAs than intended. Despite the presence of the motive test, business has expressed uncertainty and concern over the risk of RDAs falling foul of Part 14A if a company carries out preliminary work in the furtherance of R&D and is sold before reaching the point of trading. HMRC considers that this risks undermining capital investment in R&D.

Therefore, the Finance Bill 2014 will amend the definition of "deductible amounts" in Part 14A to exclude expenditure that crystallises as RDAs. This change, which should remove tax risk that may fetter R&D investment, will apply to qualifying changes of ownership (which trigger Part 14A) occurring on or after 1 April 2014.

(See TIIN, Targeted anti-avoidance loss buying rules: exclusion of research and development allowances, HM Treasury: 2014 Budget, paragraph 2.121 and Overview, paragraph 1.22.)

Increase in repayable R&D tax credit for loss-making SMEs

With effect from 1 April 2014, the tax credit for R&D that loss-making SMEs can claim by way of a cash sum from HMRC will increase from 11% to 14.5% of the enhanced R&D expenditure (currently enhanced to 225% of actual qualifying expenditure). Provisions for claiming the relief, which exists to promote projects that seek an advance in science or technology, are set out in sections 1054 to 1058 of the Corporation Tax Act 2009. An SME is defined as a company or organisation with fewer than 500 employees and either an annual turnover not exceeding EUR100 million or a balance sheet not exceeding EUR85 million. For more details on claiming the relief, see Practice note, R&D tax reliefs: practical aspects.

(See HM Treasury: 2014 Budget, paragraph 2.110, Overview, paragraph 1.29 and HM Government: Budget 2014: policy costings, page 15.)

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