Corporation tax, VAT, PAYE, NIC, air passenger duty the list of taxes goes on and at considerable cost to business.

Hence, despite the frowns of the Public Accounts Committee and the attention of the media, tax planning - how, where and when tax will be incurred – remains of critical importance for UK businesses.

Nevertheless, public scrutiny has persuaded many companies to reconsider their tax strategies, focusing their efforts towards maximising ‘government sponsored’ tax reliefs and incentives.

This article provides an outline of four popular options open to companies of all sizes to manage their tax liabilities in a ‘clean-living’ way.

1. Maximise Tax Relief on Capex

Companies often under-claim tax relief (i.e. capital allowances) on fixed asset expenditure. Whilst ‘visible’ assets such as IT equipment, furniture and other chattels are relatively easily added to capital allowances pools, capital allowances on qualifying fixtures within buildings are often less visible or even overlooked entirely.

This applies equally to direct expenditure on property construction / refurbishments, in addition to acquisitions of used properties.

Whilst direct spend on equipment, furniture etc. is easily identifiable from a company’s fixed asset register, what lies behind building/construction work is usually contained within a Bill of Quantities (which might simply say ‘Valuation No. 3 - £100,000’) and not on a fixed asset register. Short of wading through a massive Bill of Quantities and allocating expenditure line by line to the most beneficial heads of claim, there will be, de facto, an under-claim.

The rules regarding the acquisitions of used properties, and who gets the entitlement to capital allowances are complex, and beyond the scope of this article, but key points to note are:

• The amount allocated to chattels in a Special Purchase Agreement(SPA) is not the extent of the purchaser’s capital allowances entitlement. This allocation ignores the fixtures, which are in land law, part of the property. The amount paid for fixtures is within the amount paid for the property, and it might be possible to make a claim for such fixtures on a just and reasonable apportionment basis, particularly in relation to transactions taking place before 1 April 2012.
• New rules applying to transactions from 1 April 2014 (transitional rules apply between 1 April 2012 and 1 April 2014) mean that a purchaser can only claim capital allowances on fixtures via a s198 election and in circumstances where the vendor has “pooled” the relevant expenditure. This is known as the mandatory pooling requirement and requires the vendor to formally notify the expenditure to HMRC in a tax return. Just and reasonable apportionments are restricted to instances where previous owners are not entitled to claim (e.g. non taxpayers). The broad implication of this is that if the vendor hasn’t maximised his claims then that tax relief cannot be passed onto to a purchaser and is lost forever, for everybody.

Thankfully, where capital allowances have been under-claimed, it usually isn’t too late to rectify the position. The time limits for capital allowances claims are generous – effectively there is no time limit – a company can identify qualifying expenditure and start to claim capital allowances on it at any time (provided that it still owns it) opening up the prospect of retrospective clams.

There are also a couple of special reliefs which are (frustratingly) often overlooked, and worthy of mention, because they are so good:

• Research & Development Allowances – 100% deduction for capex incurred for providing facilities for R&D. This applies to all capex except for land (and residential usage) so is very wide – if a company incurs £1m constructing an R&D lab on land it already owns, it is likely that it will be able to treat the whole £1m as fully deductible in the year it is incurred.
• Business Premises Renovation Allowances – 100% deduction for expenditure on repair, renovation or conversion of empty bushiness property in a disadvantaged area. Again, this is wide, applying to structural type costs that may otherwise not qualify for any tax relief at all. ‘Empty’ in this sense means unused for 1 year or more at the date the works commence. The whole of NI is regarded as ‘disadvantaged’ for the purposes of this relief.

2. Explore the Patent Box

The patent box went live on 1 April 2013 and very few companies have fully grasped it, even those with patents.

The prize is an effective tax rate of 10% (via a further enhanced deduction) on qualifying company profits attributable to patents. The key thing to know is that if a product includes just one patent then the whole of the company’s turnover in respect of that product is, prima facie, within the patent box.

There are a number of nuances in calculating Patent Box profit which throw up surprising results – for example, it is possible that a profitable company with all of its sales from patents might have nil profits in the Patent Box and therefore get zero benefit. Equally, a company with just 25% of its sales from patents could end up with 75% of its profits in the Patent Box, and subject to a lower effective rate of tax of 10%.

Often, there are ways to optimise a company’s position, with some planning, but if the base position isn’t explored first that won’t be possible. Before we start to worry about what Margaret Hodge might think, here is the following from HMRC’s guidance:

• “Companies may wish to make changes to their commercial arrangements in order to take advantage of the Patent Box. In general, where the resulting arrangements would not have been taken to be tax advantage schemes if they had been in place from scratch, then reasonable and commercially appropriate steps taken to restructure group arrangements to maximise benefits from the Patent Box will not be taken to be a tax avoidance scheme ”

The following points are also worth knowing:

• Companies that don’t sell products with patented inventions in them but rather use a patent in undertaking a process or providing a service can still come within the Patent Box and can calculate a notional royalty to establish their Patent Box profit.
• It is not essential to be the owner of patent to come within the patent box – an exclusive licence may suffice.
• There is a mechanism which allows companies to look back from the grant of a patent to the original patent application (up to a max of 6 years, but not before 1 April 2013) and calculate the patent box benefit retrospectively. This means that even if a company does not have any patents, it could be worthwhile applying for one - even though a patent might not be granted for several years, provided it is eventually granted, the benefit accrues from the date of application.

3. Get a Super Deduction for R&D

R&D tax relief / credits allow a company to get greater tax deductions than the money they have actually spent.

For example, normally if a company incurs costs of £100k, the tax deduction is for £100k, saving tax (at current corporation tax rates) of £23k.

However, if the same company incurs costs of £100k in relation to ‘qualifying R&D’, the tax deduction is for £225k, saving tax of £52k.

In other words, there is an additional deduction equal to 125% of qualifying costs. That is the rate applying to Small and Medium sized Enterprises (“SMEs”). A separate, less favourable scheme applies for Large companies where the additional deduction is 30% of qualifying costs.

There is a generous definition of SME, which is effectively twice that of the normal EC definition, and it is possible for companies with up to 500 employees to still be regarded as SME.

The big question and often an area of subjectivity is whether or not the company is undertaking qualifying R&D. The good news is the breadth of the definition of R&D for tax purposes (according to the Department for Business, Innovation & Skills). Consequently, companies in non-obvious sectors such as food and construction have made valid R&D claims and saved significant amounts of tax.

Some other key points to note are as follows:

• SMEs with tax losses are able to surrender that loss (to the extent that it relates to an enhanced R&D deduction) for 11% cash back from HMRC.
• If an SME receives grant support towards an R&D project there will be an adverse impact on the company’s R&D tax relief claims. If the grant is a notified state aid, then, regardless of the level of grant funding, the company will be precluded from claiming under the SME scheme for the entire project costs, and a claim may be allowed under the Large company scheme instead. If the grant is not a notified state aid an SME can claim under the Large company scheme to the extent of the grant and under the SME scheme for the rest of the costs.
• From 1 April 2013 a new R&D regime for Large companies was introduced (and available for SMEs that are precluded from claiming under the SME scheme – see above). Instead of a super deduction companies can opt to receive a taxable grant-like credit (referred to as the “Research & Development Expenditure Credit” or “RDEC”) equal to 10% of qualifying R&D spend. In this respect, qualifying costs are calculated in exactly the same way as the existing super deduction scheme. Like any other grant, the RDEC is taxable but the credit itself is available, subject to a number of conditions, against the company’s corporation tax liability for the period.
• From 1 April 2016 the existing super deduction for large companies will be discontinued and the RDEC will be effectively mandatory.
• For the first time, loss making companies that are Large (or SMEs precluded from the SME scheme) will be able to get cash back for their R&D expenditure.

4. Exempt Overseas Branches

UK companies are subject to UK corporation tax on worldwide profits, regardless of where they are earned, with double tax relief available to the extent that the UK company has branches in overseas jurisdictions which are paying tax in those countries.

The UK company will pay corporation tax at an effective rate of at least the UK rate of 23%, and potentially more if the overseas branches are in countries with higher rates of tax than the UK.

Since July 2011 it has been possible to exempt overseas branches from UK corporation tax so that UK corporation tax is only due on UK profits. Where a company has branches in higher tax jurisdictions that has no tax benefit, as the election will not change the total amount of tax suffered, or indeed the tax authority to whom it is paid.

However, where the company has branches in jurisdictions with lower tax rates than the UK there is a real saving to be made. Take a UK company that has a branch in RoI - by making the branch exemption election, RoI profits can be ring-fenced from UK tax, and only chargeable in RoI, saving tax of 10.5% (being the difference between the current UK and RoI tax rates of 23% and 12.5% respectively) on the RoI profits.

Many companies in NI have operations in RoI and for those, making the branch exemption election is an easy way of trimming tax bills.

Conclusion

Whilst the above reliefs don’t apply to every business, they are applicable to some degree to most. Indeed many companies are able to avail of a combination of these incentives to significantly lower corporation tax bills and it’s not unusual for very profitable companies to have an overall effective tax rate of 0% (i.e. better than 12.5%!). That might sound wrong but it is exactly what government policy is seeking to achieve as in return such companies are creating high quality jobs (with significant PAYE and NIC income for HMRC), and improving the knowledge base and the overall competiveness of the UK in a global economy.

Michael Heinicke is a Senior Manager within PwC’s tax team in Belfast

Email: michael.heinicke@uk.pwc.com