Impact of 2008 Budget on Intangible Property

May 25, 2008

Pre-Budget 2008 Regime

Currently, the Finance Act 2002, sch 29 provides the tax regime for intangible assets of companies.  Schedule 29 applies to intangible fixed assets created on or after 1 April 2002 or, if created prior to 1 April 2002, to intangible fixed assets transferred between unrelated parties.  For the purpose of sch 29 intangible fixed assets are assets that do not have physical substance but are identifiable and are controlled by the entity through custody or legal rights.1 That definition includes intellectual property which means:

·         any patent, trademark, registered design, copyright or design right, plant breeders’ rights, or rights under the Plant Varieties Act 1997, s 7;

·         any right under the law of the country or the territory outside the UK corresponding to or similar to a right within the point above;

·         any information or technique not protected by a right above but having industrial, commercial or other economic value; and

·         any licence or other right in respect of any of the above.

The provisions of sch 29 also apply to both purchased and internally generated goodwill.

Since 2002, tax legislation regarding companies’ intangible fixed assets has been introduced which affords corporation tax relief to a company incurring expenditure on intangible fixed assets and goodwill.


Post-Budget 2008 Regime

The Finance Bill 2008 which was published on 27 March 2008 contains the following measures which may affect Intellectual Property2 and therefore are relevant to such IT and technologies companies, where very often intellectual property is the main (or one of the main) asset(s) of such companies.


·         Provisions relating to Anti-Avoidance

To make it clear that the effect of related party rules in relation to corporate intangible assets regime is unaffected by any administration, liquidation or other insolvency proceedings or equivalent arrangements that any company or partnership may be involved in.  It is expected that the measure will affect transactions in respect of intangible assets (including royalties) on or after 12 March 2008.  Currently, under sch 29, para 95, there are four tests to determine whether parties are related.3

The Finance Bill 2008  under part 2, para 62  requires, by introducing a new para 95A, all rules in respect of the definition related parties to have effect disregarding any insolvency or similar proceedings and any equivalent arrangements. This includes the situation where a company or partnership is the subject of a procedure under another law or in another country which is equivalent to UK insolvency arrangements. The disregard must have effect whether the company or partnership subject to the rules is solvent or insolvent and whether the company or partnership is one of the related parties or another company or partnership whose circumstances could be relevant to any of the tests in para 95.  Business will therefore be prevented from avoiding the effect of the related party rules by ensuring that one party to the transaction is in administration, liquidation or similar. This is of interest to IT and technology companies who are considering a restructure, or other arrangement and are drawing their corporate acquisition plans.


·         Changes to Research and Development Schemes

The research and development tax credit system scheme for small and medium sized companies (SME) was introduced in April 2000.  The Finance Act 2002 later extended the regime for large companies as well. 

Research and Development is defined, for tax purposes, in relation to activities such as:

·       advancing overall knowledge or capability in a field of science or technology,

·       creating a process,  material,  device,  product or service with the aim of achieving an advance in the field of science or technology,

·       making an appreciable improvement to an existing process, material, device, product or service through scientific or technological change,

·       using science or technology to duplicate the effect of any existing process, material, device, product or service in a new or appreciably improved way.4

The scheme for SMEs allows a relief from corporation tax at the rate of 150% of the qualifying revenue expenditure for the accounting period after 1 April 2000 (this scheme has not been extended to sole traders or partnerships).5

In the 2007 Budget it was announced that the rate of tax relief for small and medium enterprises would increase from 150% to 175% with effect from 2008 and 2009 (subject to EU State Aid approval). No change has been made in the amount of the tax credit which remains £24 per every £100 of expenditure.  Various restrictions apply such as that the payment of tax credit cannot exceed total amount of PAYE and Class 1 NI Contributions. 

The Finance Bill 2008, in sch 8 and 9,  confirmed the above extension although the date of implementation has not yet been announced (it will occur by way of Treasury order) and is subject to EU State Aid approval.  Again, the confirmation of the extension of the above credit is of interest to SMEs and larger technology companies who are drawing up their investment plans and considering tax relief.

For the purposes of a company receiving the tax credit, a medium sized enterprise is normally a company which has fewer than 250 employees, and an annual turnover not exceeding 40 million Euros, a normal balance sheet total not exceeding 27 million Euros and less than 25% of its capital voting rights owned by an enterprise that is not itself an SME.  The Finance Act 2007 has also extended the scheme to companies that have fewer than 500 employees and an annual turnover not exceeding 100 million Euros and/or a balance sheet not exceeding 86 million Euros (the so called medium sized companies).  Again this change is subject to EU State Aid approval. 

The 2007 Budget also announced an increase of the qualifying expenditure for large companies from 125% to 130%.  This extension has been confirmed in the 2008 Budget and Finance Bill 2008 and it will come into effect once EU State Aid approval has been received. 

The Finance Bill 2008 also indicates that new conditions will be added to SME and VRR Schemes6 to ensure they conform with the EU State Aid requirements.  Under the Finance Bill 2008, it was announced that new conditions will be added (a) preventing, for example, companies whose most recent accounts have not been prepared on a going concern basis from claiming the relief7; (b) imposing a cap of 7.5 million Euros on the amount of relief available per project under the SME and VRR Schemes8 and (c) imposing a requirement that large companies claiming VRR make a declaration as to the incentive effect of the relief9.  To comply with EU State Aid requirements, the rate of relief under the VRR Scheme will be reduced for all companies from 50% to 40%10.

The above changes have been announced in a drive to promote innovation and encourage all round investment.

Dr Maria Anassutzi is a partner specialising on technology procurement and related issues at the London office of Harris Cartier LLP where she heads the IP/IT department of the firm and can be contacted on 0207 4409648 or by email at and Tim Cook is a partner at Chartered Accountants Wilder Coe specialising on tax issues and can be contacted on 0207 724 6060 or by email at


1         Paragraph 2 of Financial Reporting Standard 10;

2         Budget 2008, BN23;

3         The four cases in which company A is a related party in relation to company B are when:

·         company A has control of or holds a major interest in company B (and vice versa);

·         company A and company B are under the control of the same person;

·         company B has five or fewer participators (a close company) and company A is a participator in company B or is a participator in a company that has control of or holds a major interest in company B;

·         company A and company B are within the same group.

4         Research and Development (Prescribed Activities) Regulations 2004, reg 2;

5         Finance Act 2000, sch 20;

6             Clause 24 introducing sch 8 of Finance Bill 2008 which makes changes to part 2 of sch 20 to Finance Act 2000 to the rates of relief available under the small and medium sized companies research and development Scheme (sch 20 of Finance Act 2000), to the large companies research and development Scheme (sch 12 to Finance Act 2002) and to the Vaccine Research Relief Scheme (sch 13 to Finance Act 2002);

7         Clause 25 introducing sch 9 of Finance Bill 2008;

8               Clause 26 introducing sch 10 of the Finance Bill 2008;

9               Clause 27 amends para 21 of part 3 of sch 13 of the Finance Act 2002;

10        Budget 2008, BN05 and clause 24 of sch 8 of Finance Bill 2008.