Ai vs. legacy industry

Artificial intelligence is undoubtedly a growing segment of technology and society, but history shows that technological advances don’t eliminate the need for work, though they can shift its pattern.

This applies to agricultural production. In the UK, more than 20 per cent of the workforce was employed in the agricultural sector at the turn of the 20th century, while today, thanks to mechanisation, less than one percent work in agricultural roles. However, that small group produces vastly more food than their predecessors a century ago, which is a clear benefit to society.

Ai is likely to drive other significant productivity gains too, and that should also feed through into the cost of providing some public services. However it’s difficult to see many inroads being made into the welfare bill, particularly if fewer working hours per capita lead to the introduction of a Universal Income paid by governments to their citizens.

Taxes & a need for change

If income tax receipts should fall as automation rises, there are a number of levers governments can pull to push up tax revenues, while other existing taxes may have to pull more weight.

Consumption taxes like VAT could be hiked, and if people are working less then they may have time to consume more, which would swell coffers from this kind of taxation even without a rise in the headline rate.

Taxes on business or wealth could also enter the equation if governments find the rise of the robots opens up a black hole in their budgets.

Alternatively, new taxes may be introduced which directly tax automated production, or the gains made by owners of that production.

Indeed, the UK is now forging ahead with a digital sales tax which shows some governments are not simply going to give technology a free pass when it comes to contributing to the tax take. However, ti should be noted an alliance of Ireland, Sweden, Denmark and Germany blocked the proposal in Brussels for an EU digital sales tax on 29 November 2018.

Why Ai could spur a change in taxes

Artificial intelligence will undoubtedly deliver progress in many important areas, particularly in health care.

The accountancy firm PwC reckons that UK GDP will be around 10 per cent higher in 2030 as a result of the Ai revolution, mainly through its ability to drive consumption by the production of better and more tailored products. In the long term the impact of Ai is likely to be bigger yet, and the tax system will have to adjust accordingly.

It’s too early to call how this will happen – however, one thing we can be relatively sure of is that different models will be adopted across the globe, as political ideologies feed into the equation.

Laith Khalaf

Laith Khalaf is a senior analyst with Hargreaves Lansdown and has worked for the retail investor platform since 2001, after graduating from Cambridge University.

His research encompasses funds, markets and investment trends.

Laith is a well-known commentator and frequently features on television and radio, as well as in the national press.

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Mark Tighe, the CEO of specialist tax relief firm Catax, talks to IMS StratNews about Research and Development tax relief.

 

Let’s start with the basics of Research and Development.

Despite Research and Development (R&D) tax relief being introduced at the turn of the Millennium, the reality is that significant confusion remains over which businesses are eligible and what they can actually claim for: R&D tax relief is a form of government subsidy, designed to encourage greater investment and economic growth in the UK, by stimulating innovation.

 

And to put it simply, any business of any size and in any sector can qualify for Research and Development tax relief.

 

 

So long as a firm has developed a new product, service or business process in the past two years, they could be unknowingly missing out on these lucrative government tax breaks on work they’ve already done.

 

 

The time taken, materials used and other money spent are all potentially eligible.

 

 

Crucially, the innovation does not need to be successful for it to qualify for the relief.

 

When executives aren’t up to speed on Research and Development

If I had a penny for every time a CEO bet me their firm wouldn’t qualify for Research and Development tax relief, I would be at least £50 richer. This relief should not be seen as some mythical pot of gold at the end of a rainbow that only large corporations, employing a retinue of workers dressed in white coats, can reach.

 

 

The truth is SMEs are just as likely to qualify, and are even able to claim a higher rate of relief than larger companies.

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Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency and taxation complexities

To find out more about Non-UK resident shareholders and directors taxation complexities see our guide via our ‘Gold Membership’ at https://www.imsstratnews.com/non-uk-resident-…rs-company-taxes/

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UK limited liability companies with Non-UK resident shareholders and directors have often had to tip-toe through a range of taxation complexities.

Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency 

However, this resident status can be affected by a double tax treaty. 

A typical treaty provision provides that, for treaty purposes, a company can be treated as a tax resident dependent on where its effective management and control is located.

Turner directs attention to official commentary relating to the OECD model tax treaty (which will apply in most cases, and the Revenue and Courts will follow), which defines the place of effective management and control as:

‘The place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions; the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.

What exactly does this mean?

• The treaty provision in relation to residency is determined by where all key operational decisions are made by the company’s executives and management: ‘The place of effective management’.
•  This location needs to be where senior figures in the company – primarily the Board of Directors – make those decisions.
• This location also needs to be where company operations mainly take place.
• A caveat or condition exists that states all of the above must be fully investigated before a company qualifies for this treaty provision, despite the overarching rules within the treaty provision.
• Ultimately therefore, if, under this test, a UK resident company is managed from overseas it may be classed as treaty non resident.

In addition:

• Significantly, business may be managed from more than one location, but a company can only have one ‘place of effective management’.

and,

• Importantly, UK tax legislation states that, where this applies, the company is treated as not resident in the UK: Note that this is a special rule – so it means that all `treaty non-resident’ companies are not UK resident for all taxation purposes

The Takeaway

Non-UK resident shareholders and directors: income tax & dividends

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SMEs: New Legislation

The UK Government has decided to introduce laws that will support small businesses (SMEs) in their efforts to retrieve money from unpaid invoices.

Previous unfair contracts prevented small suppliers from accessing invoice finance; unbalanced contracts with larger companies prevented many SMEs from securing invoice finance from providers such as banks and other investors.

The new regulations were put to Parliament on 10 September, 2018, and are set to facilitate a £1 billion long-term boost to the economy, says the Department for Business, Energy and Industrial Strategy.

How it works

The laws form part of the Government’s modern Industrial Strategy, and are designed to build an environment where small businesses are better able to thrive. They will ensure that any contractual restrictions entered into after 31 December 2018, (with certain exceptions), can be disregarded by small businesses and finance providers, effectively preventing larger businesses from abusing their market position.

The exceptions relate to contracts for financial services; those agreed with consumers or those connected to the sale of a business.

The value of invoice finance is obvious: it allows a business to raise funds by assigning their right to be paid ‘receivables’ to a finance provider in exchange for funds – which is typically around 80 per cent of the value of the invoices.

The ‘advance’ is obtained within days, as opposed to weeks, allowing a small company to manage turnover without tipping into the red. The remaining 20 per cent (minus fees and charges) is then paid when the customer settles the invoice.

It’s important to note that Invoice finance is not borrowing; the supplier receives what is effectively an advance against a future payment.

This legislation addresses anomalies relating to purchase contracts that include terms preventing access to invoice finance. This is mainly due to suppliers’ lack of foresight, where they have negotiated poorly, ultimately leaving them in a weak contractual position.

The new laws will address these detrimental contract terms. 

Expert views

Small Business Minister, Kelly Tolhurst, says: “These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.

“The proposed laws come as a number of larger businesses stop their suppliers from assigning ‘receivables’ – the right to receive the proceeds from an invoice. This assignment is essential for invoice finance to operate.”

She states that restrictive contract terms are too often used by larger businesses to maintain a hold over their suppliers. Small suppliers then find themselves unable to negotiate changes to a proposed contract because of their lack of power in the marketplace, Tolhurst argues.

The minister views the UK’s 5.7 million small businesses as the backbone of the UK’s economy, “and central to our modern Industrial Strategy”, with more than 1,000 starting up every day.

CEO of the innovation tax specialist GovGrant, Luke Hamm, which has a spotlight interest on research and development, says he welcomes the revised regulations.

Hamm states, “We hear regularly from smaller suppliers who are tied into restrictive contracts with larger players, for example in the supermarket sector, and it is extremely difficult for them to negotiate changes in contractual terms.

The CEO has urged the Chancellor of the Exchequer, Philip Hammond, to prioritise small business in November’s forthcoming Budget, citing innovation and R&D as a policy areas that seriously require a boost.

Hamm says, “We need to prioritise innovation and industrial strategy … As the announcement on invoice finance shows, the government’s industrial strategy has its heart in the right place, but it’s still unambitious, and needs more imagination and drive.

“Aiming for 2.4 per cent of GDP invested in R&D by 2027 is mediocre; that’s where Germany is today.

“We’d also like to see more help for the smallest companies, where they are scaling up but opt not to draw market salaries. The scheme doesn’t allow for that.”

Hamm also highlights the importance of the forthcoming annual HMRC report on R&D tax credit statistics, which he argues will provide an important snapshot of just how widely the UK’s innovative companies, including SMEs, are making use of the government’s tax credit system.

by Ingrid Smith

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