Chancellor focusses on technology and IP rich companies

In amongst a package of wider investment measures to support UK innovation, and position the UK as a global leader in science and innovation, there were several targeted measures towards ‘IP rich’ businesses.

In a measure to tackle abuse of the SME R&D tax credit scheme, there will be a reintroduction of the cap restricting the payable credit by reference to PAYE and NIC paid by the company, albeit this will be at a level 3x its former level, and will be introduced from 2020 following a period of consultation. HMRC anticipate this only affecting 5 per cent of current claims, and will consult to ensure genuine claimants are not unfairly prejudiced – whilst also tackling identified cases of fraudulent claims. On balance, this would appear to be a fair reaction to the growing levels of abuse on what is already a very generous relief to UK innovative businesses, although we would encourage care to ensure that this doesn’t impact fledgling start-ups where founders will often not draw a salary, and will rely more on contractors – on the face of it, these companies could suffer based on these proposals.

There were then two further measures announced which will make future transactions involving these businesses more attractive. Firstly, in what appears to partially reverse a change in 2015, the government will introduce tax relief for the cost of goodwill in the acquisition of businesses with ‘eligible intellectual property’ from April 2019.

It will also alter the regime’s degrouping charge so that a charge will not arise where degrouping is part of a transaction that qualifies for Substantial Shareholding Exemption (SSE), which is a welcome change that removes a long known issue in reconstructions of IP rich businesses, and aligns IP with other assets that already benefit from this relief. These changes will have effect from 7 November 2018.

Both of these are very welcome changes to the treatment of innovative businesses.