Corporation Tax in case of Intangible Fixed Assets and Transfer Pricing after Business Registration UK

16 Oct

The losses or gains that occur on the assets of intangible kind are considered for the purposes of tax in the same way as they are taken into account in the case of accounts. This blog will be discussing the basic definition, general practice, patent box, rules for transfer pricing and research and development rules for the companies.

Definition of the Intellectual Property or Assets and General Practice

Any kind of expense or the income is to be subtracted or taxed in the form of trading income that includes amortization and depreciation linked with good will, intellectual property that includes copyrights and patents and other such intangible assets consisting of brands and agricultural quotas. The condition that has to be fulfilled to make sure that no adjustment to profit is required before taxation for the purposes of tax, is that the accounts should be prepared with the help of accounting practice that is acceptable. However, an exception exists to this that states that, the company may make a claim of a writing down allowance of 4 percent instead of subtracting the amortization or the decrement as mentioned in the accounts. Such type of a claim is made in the case when the registered limited company UK did not put any charge on decrement on a specific fixed asset of intangible type.

The deduction in all the credits or debits related to the intellectual property is performed in the form of:

  • Income acquired from property in case of the asset being used for a business name registration UK that lets property
  • A trading income in case of the asset being utilized for the purposes of trade
  • A miscellaneous income

As far as the relationships of loan are considered, the rules are applicable to credits and capital debits and also the items of revenue. Hence, the amounts that are related to disposals are also taken into account in the statement of income.

When the disposal of an intangible asset is made, then a claim might be made for the replacement of assets relief of business name registration UK. The claim is of similar nature as that in the case of chargeable gains. The details can be found in the chargeable gains’ rollover relief for registered limited company UK.

Tax Rules for the Companies that Make Patent Box

In case of a company that forms a patent box election is liable to tax at a corporation tax’s decremented rate on the profits of its patent box.

From the date of April 1, 2013, the patent owner companies are allowed to elect for the profits in relation to those patents to occur within a patent box.

The scheme is applicable to all the profits that are attributable to patents that qualify. The royalty income acquired directly from the patents is included in the profits. Also, the profits include a part of the profits from the sale of products where the patent was used for producing them. In order for the company to qualify, the company should continue the development of qualification as related to the patent that includes the development of products incorporating the patent or the development of the patent itself.

The rules keep adding with time but the main general rule remains the same, that is, the company formation UK that makes a patent box election will only be liable to tax at a reasonable rate of 10 percent on the profits of patent box. The relief is provided by giving a deduction of tax while computing the total profits liable to tax, in a way that the tax’s effective rate on the profit of patent box is 10 percent.

Determination of the Company’s Patent Box Operation

In order to see the operation, the first step involved is the determination of the profit of patent or simply patent profit. The result is then made a subject to a count of subtractions in order to obtain the total profit of patent or the net patent profit.

The decremented rate of tax is obtained by subtracting an amount from the company formation UK profits liable to tax so that when the rate of corporation tax is applied to the decremented figure, the effective rate on the patent profits is 10 percent.

For example, in FY 2013, only 60 percent profit in the patent box is liable to tax at the rate of 10 percent. In this case, the deduction is calculated in the following way:

Net patent profit is multiplied by 60 percent which is further multiplied by the figure (MR – 10%) and then divided by MR. Here, MR is known as the main rate of corporation tax, and is defined for the year of 2013 to be 23 percent.

Legislation of Transfer Pricing

The legislation of transfer pricing inhibits the profits’ manipulation between the members of a group which can arise in the case when the company makes the choice of buying and selling the goods at a rate that is not equivalent to the market price.

Basic Rules and Regulations in the Transfer Pricing

The companies that are subject to the common control can make the structure of their transactions in a manner that they are able to transfer losses or profits from one company to another company. As an example, consider the case of a company that makes a wish to sell their goods that are priced at a rate of 20,000 pounds to a third party of independent nature. In such a case, all the profit that is obtained on the sale occurs to the company that makes the sale. In an alternative manner, the sale could be re-arranged in a way that the selling company comes first, then the goods invoice value is 16000 pounds which is given to the subsidiary company that has a goods invoice value of 20,000 pounds that is then given to the buying company. In this type of re-arrangement, the 4000 pounds out of the profit has been moved towards the subsidiary.

This re-arrangement technique can be used for the direction of profits to a company with a lower rate of tax, or when they can be covered by the losses that are brought forward, or even to an offshore company that pays tax at a lower rate. This is known as the tax advantage and there exists an anti-avoidance legislation that needs the profit to be calculated as if the carrying out of transactions had been done at an arm’s length and not with the values used in reality. This is known as a transfer pricing adjustment.

There are two cases in which the rules of transfer pricing are applicable to transactions that occur between two persons. The cases are as under:

  • If one person takes part in the management, control or capital of the other person directly or indirectly, or
  • If a third party takes part in the management, capital or control of both persons directly or in an indirect manner.

When an adjustment in the transfer pricing is needed to the calculation of tax of a company that is liable to corporation tax of UK and the other person to the transaction, who is at a disadvantage, is under the charge of a tax in UK, then it can be claimed to make variation in the calculation of tax of the person who is at the disadvantaged end on the basis of an arm’s length, and not with the price that exists in reality. This claim must be claimed after the date of return, within the duration of two years that includes the adjustment of transfer.

What Happens in the Case of Enterprises of Small and Medium Size?

The small and medium sized enterprises, shortly known as the SMEs, are not included in the transfer pricing needs as a normal practice.

The SMEs for the purposes of transfer pricing rules are defined as the number of staff that should be less than, and either the turnover or the total from the balance sheet not more than a prescribed set of values. The exemption is not applicable to transactions with parties that reside in the territory that does not qualify. This includes most of the foreign countries that do not have a treaty of double tax with the UK, and some other specific designated countries.

The HMRC may give a direction for a medium sized enterprise to be brought within the legislation’s scope.

The Transactions that Get Affected

The rules are applicable to all kinds of transactions. The rules are not only applicable to the basic cases of selling the goods or providing the services, but are also applicable to the loans. An adjustment of transfer pricing may be needed if the loan would not have been dealt between the two companies if there was not a relationship between them, or in the case if a distinct amount would have been given as rent, or in the case if the rate if interest would have been distinct. Hence, an adjustment to the charged interest in the accounts would be required if the loan was large enough that in the situation of an arm’s length, the company that gave the loan would have needed equity, that includes shares and not loans. Such a situation is referred to as the situation of thin capitalization.

Implications of Tax on Companies

The companies should perform a self-assessment on themselves to check their liability to tax according to the rules of transfer pricing and make the payment of any corporation tax that remains due. There exists a procedure of statutory type in the case of advance pricing arrangements (APAs) where a company can make an agreement prior to its transfer pricing policy is acceptable to HMRC, i.e. not needing an adjustment in self-assessment. The facility of APA is on choice but companies may feel the requirement of facility since it gives the required confirmation of advance that the approach to transfer pricing in their self-assessment can be accepted.

Research and Development in Companies

The companies may make a claim of subtraction for the capital expenditure and actual amount of revenue on research and development. SMEs can acquire 225 percent of relief for the qualification of research and development expense and the large companies may acquire a relief of 130 percent. An alternative named as above the line tax credit exists for the big companies.

Basic Rules in Research and Development

The expense of research and development having a revenue nature might be subtracted as an allowable expense in the case if it is in relation with the trade of the company and the company undertakes the activity or the activity is undertaken on company’s behalf.

The area of research and development consists of the activities that would be defined as such under normally acceptable practice of accounting. This is in relation with the trade if it leads to an extended version of the trade or its direction is towards the workers’ medical welfare who are employed in the trade. However, the definition does not throw light on the expense that is suffered on obtaining the rights that are occurred as a result of research and development.

 The capital expense on research and development that is related to the trade of the company is also entirely available as a subtraction, which means that there is an availability of 100 percent allowances. This includes the capital expense on providing the laboratories and the equipment for research. However, it must be noted here that there is no availability of allowance for the expense on land. In case of any proceeds that get acquired from disposing of the assets of capital nature, then that receipt is liable to tax in the form of an income of trade or a trading income.

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