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With the Chancellor's speech still ringing in our ears, we bring together the most important features of the Summer Budget 2015 for IP & IT lawyers alongside expert analysis and industry comment.
What was relevant in the Summer Budget for IP & IT lawyers?
The government has announced a measure which offers tax incentives to encourage private investment into small and growing companies which would otherwise struggle to access finance. The schemes aim to be well-targeted and in line with state aid rules. The measure also aims to ensure that the UK provides extra support to innovative companies and those which are undergoing significant change. HMRC's Tax Information and Impact Note (TIIN) updates and replaces the TIIN published on 24 March 2015.
The government has announced a measure which amends legislation so that universities and charities are unable to claim the Research & Development Expenditure Credit (RDEC), in line with the original intention of the policy. This is to ensure the scheme remains effective and well-targeted to business research and development (R&D).
Corporation tax relief for companies who write off the cost of purchased goodwill and certain customer related intangible assets is to be removed. New legislation to be introduced in Summer Finance Bill 2015 will amend the Corporation Tax Act 2009, Pt 8, applicable to all acquisitions made on or after 8 July 2015 unless made pursuant to an unconditional obligation entered into before that date. It also applies to all goodwill created on or after that date. Relief will still be available if the goodwill is sold.
What does this mean for IP & IT lawyers?
What are the headlines for the Summer Budget for IP & IT lawyers and why?
Dan Brook, partner, and Laura Whiting, senior associate, Hogan Lovells: The main feature which will affect the practice of IP/IT lawyers is the abolition of the corporation tax deduction for acquired reputational value (goodwill). This will impact transactions where IP is a significant part of the business being sold.
Additional budget points of interest on the investment side include:
o up to £10m to the broadband programme from April 2016 to support connectivity in the South West
o industrial support for specific science investments--including £128m in the UK Collaboration for Research in Infrastructure and Cities, with its hub to be established in London
Investments in digital infrastructure and research such as these signal the government's desire to strengthen the UK's knowledge economy, which can only be positive news for IP and IT lawyers. There seem to be few immediate implications for practice in this Budget, though lawyers will need to understand the detail as the various initiatives are published.
Joanne Frears, head of the innovation, technology and intellectual property law team, Jeffrey Green Russell Limited: As the Speaker shouted 'order' and invited those in the House to 'listen', the Chancellor delivered an unremarkable Budget with few surprises. Notable by their omission were changes to, or extension of, the patent box regime and further tax breaks for film, media and technology.
The government has created an extensive network of 'catapult' centres that aim to bring together businesses, scientists and engineers to drive the commercialisation of technology. Innovate UK is working with various research councils to identify further areas where a catapult structure could ensure the UK is at the forefront of commercialising technologies that offer global opportunities. We can expect proposals soon.
To bolster this, the government will invest £23m in six next generation digital economy centres (NGDEC's) in London, Swansea, Newcastle, Nottingham, York and Bath. It is hoped that it will be possible to leverage a further £22m of additional funding across sectors of the digital economy, including the creative industries, finance, healthcare and education, by collaborating with:
o local enterprise partnerships (LEPs)
o regional councils, and
o local small and medium-sized enterprises
Let's be clear though, £22m is about four hours' profit for Apple and is a drop in the ocean given that the funding will be spread over four years and is less than a fifth of the amount the publishing and creative sectors contribute to the UK economy each year.
More 'real' and grass roots assistance to the creative industries came in the last Budget, with tax relief for orchestras, and this has been added to with new tax reliefs to support:
o high-end television
o video games
o children's television, and
o film--through an expansion of relief
These have been successful in the past. Animation tax credits, for example, ensured the animation industry remained in the UK--keeping Wallace and Gromit out of Bollywood. The challenge for the government, however, is how to achieve a balance between good creativity, which may come from outside the UK, and being over-protective about creating sustainable jobs in the UK. Some film companies will tell you that the quality of output from the Canadian and French film industries has suffered because their tax regimes are too prescriptive about use of nationals for everything from writers to grips and it would be counter-productive to allow such measures to creep in under the banner of 'helping' the creative industries.
On the back of Professor Dame Ann Dowling's review into how the UK's research base can further collaborate with industry, the Budget suggests that universities, LEPs, businesses and cities will be invited to work with central government to map strengths and identify potential areas of strategic focus for different regions through a series of science and innovation audits. Further details of how this will be funded and rolled out will be set out in the spending review.
The usual rhetoric around increased development and a revised growth forecast was undermined somewhat by recognition that the UK has the worst levels of productivity in Europe. The government will release details of a drive to improve this on 10 July 2015.
Cuts in corporation tax to 19% in 2017 and 18% in 2020 will assist across the mid-range creative sector. Small firms get a boost with the new employment allowance and the annual investment allowance will increase--encouraging investors across the board.
Miranda Cass, partner, and Samuel Rippon, associate, Bristows LLP: Unlike previous Budgets that have announced specific tax measures for the IP/IT industries, such as the patent box, R&D tax reliefs and creative industry reliefs, the Summer Budget, in tax terms, was not about helping specific industries. The Summer Budget instead left people wondering whether George Osborne was simply taking the opportunity to introduce tax measures that he would never have achieved during the last Parliament.
In pure tax terms, the news that the main rate of corporation tax is to be reduced to 19% in 2017 and to 18% in 2020 is bound to be welcomed in the IP/IT sector--where activity levels are already high. The same can be said of the increase in the permanent level of the annual investment allowance for businesses, which was due to be £25,000, but will now be £200,000. Furthermore, the IP/IT industry will also be happy with the introduction of additional enterprise zones where businesses can claim enhanced capital allowances.
For workers in the IP/IT sector, changes to the non-domiciliary tax regime and changes to the taxation of dividends, which will affect anyone working through a personal service company, might have an effect on the way in which staff are recruited and engaged.
In more general terms, the government is clearly keen to show off its innovation and technology-supporting credentials. In the main Budget report, were are reminded of:
o the catapult centres that the government launched
o the £23m that will be invested in six NGDEC's around England and Wales
o a significant amount of up to £10m that will be allocated to fund local projects to provide ultrafast broadband speeds of 100mpbs in the South West
Were there any surprises?
Joanne Frears: Anyone who works at home outside London will tell you that broadband is often awful--in the countryside, it seems to be delivered by tractor, not fibre optics. To support the rural broadband, the government will allocate up to £10m to the South West broadband programme from April 2016. The fund will be available for local projects to bid into, with priority given to those delivering ultrafast speeds of 100mbps and above.
Miranda Cass and Samuel Rippon: Overwhelmingly, the suggestion that corporation tax rates will be cut again was not a topic on which we had heard any speculation. A rate of 18% must be by far the lowest of any major western nation.
What actions should IP & IT lawyers be taking as the dust settles?
Dan Brook and Laura Whiting: Practitioners should be aware of the change in the tax treatment of reputational assets when advising clients on transactions in which goodwill is acquired.
Joanne Frears: IP lawyers should watch this space and stay alert for the follow-up documents that will set out exactly what is on offer in terms of tax relief, access to funding and participating in collaborative ventures. When the detail emerges, there will be opportunities to look at who the winners will be and how smaller creative businesses can maximise their potential to access what appears to be an ever-increasing pool of funding resource. The creative sectors have long since moved out of the shadows of manufacturing and finance in terms of worldwide appeal and it's high time credit was given where it is due in terms of tax and funding. Inventors, technologists and creatives can be skittish and suspicious of such incentives though--art and money seldom make comfortable bedfellows. However, as lawyers, part of our job is to foster an understanding between them so that, in the end, everyone benefits. This Budget might not have provided the instant wins predicted for 'innovation box', but it recognises the huge contribution made to the economy by the creative and tech industries and a commitment to providing early stage access for a sector that thrives through its start-ups.
Miranda Cass and Samuel Rippon: IP/IT lawyers should hope that the further reduction in the corporate tax rate will encourage even more companies to set up in the UK. With increased funding promised for certain areas of the sector, they should be prepared for new interest in this market, which is clearly being targeted by the government as a critical area of growth in the wider economy.
What has been the reaction from industry?
Jimmy McLoughlin, deputy director, Institute of Directors (IoD): 'Britain is currently undergoing a start-up revolution, with more people setting up businesses than ever before. It is encouraging that the Budget included announcements which look to safeguard and strengthen the investment of these start-up companies
'Crowdfunding has the potential to be the biggest revolution in finance of the 21st Century, so we welcome the consultation on including it in the ISA allowance.
'It is critical to the future of the UK that everyone has the ability to share in the start-up revolution. Just 38% of IoD members are aware of tax breaks such as the Seed Enterprise Investment Scheme, indicating that the government can do far more to promote these schemes.'
Want to know more?
A full overview of the Summer Budget 2015 can be found here.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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