Does the 80:20 rule benefit Technology companies?
George Osborne’s first Budget as Chancellor had been much anticipated and did not disappoint in terms of its significance. Setting out an 80:20 rule of thumb to be applied to the ratio of spending cuts to tax rises, he announced a massive additional fiscal squeeze in order to tackle the budget deficit.
The key measures affecting business have been widely reported:
• Increase in the rate of VAT to 20% from 4 January 2011,
• Reduction in the main rate of corporation tax from 28% to 24% over 4 years and in the small companies rate from 21% to 20% next year,
• Increase in the Employer’s national insurance threshold reducing the effect of the increase in the national insurance rate,
• Capital gains tax increased to 28% for higher rate earners accompanied by an extension to the Entrepreneurs relief limits.
However there are a number of other measures that will interest Technology companies in particular. Kingston Smith’s technology team have analysed the budget for the less well publicised changes that may affect you.
The Chancellor has removed the requirement that SME companies own the intellectual property created or derived from their R&D expenditure.
This has been a particular problem for spin-out companies which license intellectual property and know-how from universities or other sponsors. Under the old rules expenditure on R&D which further developed this intellectual property was not eligible for the R&D tax credit due to the ownership requirements.
We welcome this change which opens up this valuable benefit to a group of companies who were previously unfairly excluded. Many of these businesses will be in pre-revenue stage and the payable tax credit will be extremely welcome.
Our technology team can assist those affected by ensuring that they have the systems in place to capture all eligible expenditure and maximise the R&D tax credit claims.
The Dyson review recommended increasing the rate of the R&D tax credit from 175% of eligible expenditure to 200% ‘when finances allow’. Given the Chancellor’s emphasis on the need for spending cuts across the board, the introduction of more generous reliefs without matching cuts elsewhere seems very unlikely. However the Dyson review also highlighted the importance of targeting the tax credit at hi-tech companies, small businesses and new start-ups so we can probably look forward to a watering down or limiting of the large company version of the scheme to finance improvements in the SME scheme.
A rate of 200% is not unthinkable given that the UK is competing with other countries for R&D spend and we would also like to see the rules clarified so that businesses are clearer about which projects qualify and which do not.
The rates of capital allowances, and the annual investment allowance, available in respect of expenditure on plant and machinery, are to be reduced from April 2012.
The Annual investment allowance, which currently allows companies a 100% deduction on the first £100,000 of capital expenditure, is to be limited to the first £25,000 of expenditure. The annual writing down allowance for most other assets will fall from 20% to 18%.
As the Chancellor highlighted in his speech 95% of businesses spend less than £25,000 on capital items annually so most SMEs will be unaffected by the change. However, those companies that are expecting to invest heavily in hardware or other equipment may wish to consider bringing forward the timing of this investment to benefit from the current regime.
Companies investing in R&D should also identify those capital items purchased specifically for use within their R&D as these can continue to receive a 100% deduction on purchase and do not count towards their annual investment allowance.
The rules for EIS, VCT and EMI have also been relaxed in that the business only has to have a permanent establishment in the UK rather than requiring the trade to be wholly or mainly in the UK.
As technology companies commercialise, there is a strong likelihood that some of the trade occurs outside of the UK – either to serve overseas markets or to base operations overseas on cost grounds. Historically this has lost the UK entity valuable tax benefits both on attracting new investment under EIS and VCT schemes, or in incentivising employees with EMI options. The requirement to be ‘wholly or mainly in the UK’ has now be dropped for a lesser requirement for there only to be a taxable presence in the UK.
Where expansion plans are anticipated from the outset, early stage companies looking for investment will now be able to look to Business Angel markets and to EIS and VCT funds that would have previously been unable to invest.
As predicted in our Coalition special last month the Chancellor has made clear that the State will not finance the roll out of high speed broadband.
As a carrot, the Government is promising regulatory changes to reduce the cost of rolling out broadband but it is the capital spend which is deterring private sector businesses from building or upgrading their own networks and it will be difficult for the regulator to balance the providers’ desire for higher charges with the consumer’s expectation of low cost.
We expect progress in rolling out high speed broadband to remain slow.
If you would like to discuss any of the issues raised above please contact Mark Twum-Ampofo at email@example.com.