A technology driven recovery?

Grant Thornton’s top five tax opportunities for technology companies

The technology sector is an important contributor to the UK economy, employing one in 20 of the UK workforce. Fiscally, it contributes £81 billion to the UK economy that represents more than seven per cent of GDP, more than other established industries such as construction.

With employment growth forecasted as rising by five times the national average and technology companies growing on average by five per cent during one of the worst recessions ever experienced in the UK, it is little wonder that David Cameron

has been quoted as saying that “technology based innovation is key to the economic growth that Britain so urgently needs.”

To drive this growth, and as part of the Coalition’s stated aim “to create the most competitive corporate tax regime in the G20,” a number of wide ranging tax incentives for the technology sector have been announced.

We have therefore outlined five of the key areas where we think tax savings could be achieved for companies in the technology sector.

Research and Development (R & D)R&D tax relief has been around for over 10 years but recent and proposed changes mean companies should review their claims carefully to ensure the amount of the credit is maximised. The

changes already enacted mean companies will be able to reduce their tax liability by up to £56.25 for every £100 spent. In addition, repayable cash credits should shortly become available for large companies, and restrictions on the amount of cash repaid to small & medium enterprises (SMEs) are being abolished, meaning increased scope for companies engaged in R&D to improve claims.

The patent box regimeFrom April 2013, where a company derives profits from patents granted by the UK Intellectual Property Office or the European Patent Office (whether from the sale of products incorporating

patented technology, from licensing income or from services derived from patented technology) and has been involved in the development of the patented technology, a 10% rate of tax should be available. Consideration should be given to intra-group trading to ensure maximum recognition of profits in the UK.

Tax efficient group tradingUnderstanding how your overseas subsidiaries will function and how they interact with the UK can allow for significant tax efficiencies. Depending on many factors, such as your overseas

entities’ risk profiles and commercial identity (ie will they be sales hubs, resellers or independently operated), there can be scope over the extent to which profits should be recognised in a particular jurisdiction. Having a transfer pricing policy becomes even more beneficial when you have entities in jurisdictions with low headline rates of corporation tax or with favourable tax regimes (such as the patent box).

Investor tax reliefThe enterprise investment scheme (EIS) allows investors to obtain significant income tax relief. Changes made to EIS from 6 April 2011 (and others due to apply from 6 April 2012) mean 30% relief

will be available on investments of up to £1million – a 300% increase in total potential income tax relief. Importantly, in many instances the later disposal of the shareholding also has the benefit of being exempt from capital gains tax. For investments in micro entities, the Seed Enterprise Investment Scheme allows for a 50% income tax relief on investments of up to £100,000.

Tax efficient executive payThere are various methods for rewarding key staff who are responsible for growing technology companies. The right method of making such payments, whether through share-based remuneration

or cash payments, will depend on an individual company’s circumstances. In addition to the HM Revenue & Customs ‘approved’ schemes, there are a number of tax-efficient incentive packages that are designed to drive and reward growth whilst providing tax and National Insurance savings. These packages allow for incentive payments to be subject to capital gains tax rather than income tax, meaning tax savings available of up to 34% for the higher earning participants and up to 13.8% for the company.

© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.

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