By Colin Aylott, International Tax Director at Smith & Williamson
There are many reasons why a UK business might choose to relocate. Grants, availability of staff or resources, or issues such as quality of life or transport links can all be drivers for moving overseas. A significant consideration for many businesses investigating moving their operations to new countries are the tax implications. And one area given increasing attention is the tax reliefs for R&D and intellectual property (IP).
R&D tax reliefs in the UK
The UK introduced enhanced tax reliefs for R&D expenditure in 2000 for small/medium companies and in 2002 for large companies, though this is a less generous regime. As expected, there are a number of conditions which need to be satisfied in order to claim this relief. Until recently HMRC has been keen for companies to claim it, however, the general fiscal tightening has seen this attitude change such that more claims are now coming under scrutiny. Despite this, the relief is seen as useful, if not exceptional in world terms.
The UK also now allows tax relief for amortisation or impairment of certain IP. Again, this is welcome.
Where the UK does suffer in comparison to some other countries is as follows:
• royalty income is taxable at normal corporation tax rates with no reduction in the amount chargeable to tax
• a possible restriction of expense deductions against royalty income (for a pure IP holding company)
• no opportunities for significantly accelerating tax relief for investments in valuable IP
• no reduction in payroll taxes for employees involved in R&D activities (or other personal tax concessions)
• grant income remains fully taxable.
Encouraging news on patents in the UK
The proposed UK 'patent box' regime, which is expected to apply a 10% corporation tax rate on income arising from patents, may help to deal with the first of these issues and possibly others but this is still under discussion and there is no certainty that it will be introduced. The UK also has a good treaty network which may allow more royalties to be received without deduction of withholding tax or with a reduced rate applying.
But could other locations offer better financial benefits when developing IP?
There are undoubtedly better locations, even within the EU, to create and hold IP. Subject to the specific requirements of a business, they should consider locations such as Belgium, Cyprus, Ireland, Luxembourg and Switzerland. These countries also have reasonable tax treaty networks.
For those considering where to develop and locate IP, the key tax considerations are broadly those covered above i.e. taxation of grants, tax relief for expenditure on developing or acquiring IP, tax on royalty income, deductibility of expenses, withholding taxes on royalty payments and payroll/personal tax costs. Indirect taxes should also not be ignored.
So is it really worth moving IP abroad?
Before you rush out and start relocating your IP, two key considerations must be taken into account.
• The UK is likely to charge an exit tax for any transfer based on the market value of the asset at the time of the transfer. If the development or marketing of your IP is at an advanced stage, this may be substantial.
• If your group is (and remains) UK controlled, the UK's controlled foreign company rules may apply to tax income of the (now non-UK) royalty income as it arises, so no benefit will have been achieved.
In addition, the taxation of IP is being considered in current consultations looking at reforming controlled foreign company rules and taxation of branch profits. In the long term, and in the right circumstances, there may be benefits to transferring IP, even taking into account exit charges. However, there are many factors to take into account in taking that decision and it is one that shouldn't be taken lightly. As with most aspects of tax, it is much easier to develop or acquire your IP in the 'right' place from the outset, rather than think about it down the line when it may be much more difficult and costly to move it.
For assistance with the taxation of IP or any other international tax issue, call Colin Aylott on 020 7131 8158 or email firstname.lastname@example.org
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