Directors Duties when the Company may be or is insolvent - Be aware of personal liability stalking you!

This is the next in my series of blogs for the Director’s Friend.

In a recent decision of Terence Mowschenson QC sitting as a deputy High Court Judge in the case of Oakdene Homes PLC (In Liquidation) (the ‘Company’) and Carl Stephen Turpin dated 03 November 2016 the director of the Company in Liquidation was ordered to pay the total sum of circa £825,000.00.

That is a significant sum of money for a director of a company to find post that company’s liquidation. So, what happened?

BACKGROUND

The Company’ business was residential house building. In 2007 there was a sharp slowdown in the market for residential homes as a consequence of the financial crisis.

The judge found that the Company was insolvent from the end of 2007 to 23 January 2009 when it was placed into administration.

THE CLAIMS

The lead claim advanced against the director was for £750,000.00 for a call in respect of subscription monies due on a subscription of shares in the Company.

The judge found that the Company was short of cash in 2008. In about May 2008 the director agreed to subscribe for further shares for a consideration of £750,000.00. The judge referred to contemporaneous evidence where it was found that the shares had been allotted and the liability due from the director. The judge found that the director was liable to pay that sum.

A further claim was advanced by the director in the sum of £75,000.00 for monies that the judge found were simply a misappropriation of company monies to meet the directors’ personal liability to a bank. The judge found that the director had a fiduciary duty to safeguard company assets. He did not do so, therefore he was required to make good the assets as if he was a trustee and repay the monies.

A further claim in the sum of just over £5,000.00 was found to be owed by the director as a debt.

On the facts and the law the director’s counterclaims for set off and other claims were rejected.

A small crumb of comfort was allowed by way of the director’s counterclaim for a month’s unpaid salary, 12 week’s salary by way of wrongful dismissal and a redundancy payment.

ANALYSIS

Oddly the judgment does not set out the pleaded legal basis of the Liquidators claims. However, it is likely that they were for Misfeasance pursuant to section 212 of the Insolvency Act 1986. This is a fairly typical claim that directors of a company can face it that company has been placed into Administration or Liquidation to make them personally liable.

The Court may explore the conduct of a director and may via a Misfeasance claim compel the director to repay, restore or account to the company for any property or money (plus interest), or contribute such sum to the company’s assets by way of compensation in respect of the breach of duty as the Court thinks fit.

If the company is insolvent or financially distressed, an additional duty is imposed on the director to consider or act in the interests of creditors of the company (section 172(3) of the Companies Act 2006). However, that duty is owed to the company.

This is in circumstances where, as in this case, the judge found that the Company had been insolvent over a long period of time and that means that the director(s) of the company then have a duty to consider the best interests of creditors as a whole. These interests are paramount.

COMMENT

Particularly when the company is or may be trading insolvently the paramount consideration for the well-advised director is to consider the best interests of creditors. That protective advice should be sought from an accountant, a Licensed Insolvency Practitioner or an insolvency Solicitor to forestall an application by a subsequently appointed Administrator or Liquidator for Misfeasance to make you personally liable.

WHAT TO DO NOW?

If you are faced with a claim for Misfeasance please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


Big Business: Pay your debts or risk damage to your reputation

On the 4th of May the Enterprise Act 2016 received Royal Asset. The Act established the role of the Small Business Commissioner to support small businesses, in particular, in relation to disputes with larger businesses. As part of this role, the Commissioner is to provide an in-house complaints handling function allowing small business suppliers to seek a decision from the Commissioner about a payment issue with a larger business with which the small business has a previous, current or potential supply relationship.

The consultation sets out BEIS's proposals on how the Commissioner should operate the complaints scheme, and seeks views on certain aspects of the scheme. For instance, how a small business's headcount should be calculated for the purposes of determining its eligibility to use the scheme. BEIS also asks what factors the Commissioner should take into account when considering whether to identify the larger business, if publishing a report on the dispute. The consultation closes on 7 December 2016.

While there is no date set for implementation of the regulations larger businesses need to be aware that the government proposes to give smaller business suppliers additional means of holding them to account over payment issues. They also need to be aware of the potential reputational impact, should the Commissioner publish a report about a complaint involving them. Larger businesses should familiarise themselves with BEIS's complaints scheme proposals, so that they are prepared to respond to complaints submitted by such business suppliers.

Managing Director of Breeze & Wyles Solicitors Limited Brendan O’Brien said: “The Government has made itself clear about the need to give more forms of redress to small business to ensure that it gets paid on time by larger business. It has become common practice for Large Business to use smaller businesses as a form of free banking. Given the benefit to the economy of healthy small businesses it is essential that this process creates a fair balance between the parties. Everyone must have their say in this process if it is to be effective.”

Web site content note: 

This is not legal advice; it is intended to provide information of general interest about current legal issues.


Breeze & Wyles Family Department has done it again!

It is with great pride that we, in the Breeze and Wyles Family Department, can confirm we have been awarded with the Corporate International Magazine's Global Award of Client Choice 'Family Law - Law Firm of the Year in England' for the second year running!
Congratulations Breeze and Wyles Solicitors Ltd!


Breeze & Wyles Solicitors Limited celebrates its Centenary

Breeze & Wyles Solicitors Limited have been at the centre of innovation in the legal profession for a century.   At the very beginning, in 1914 the firm was made up of just a few people; the company now boasts 11 directors and employs over 180 permanent or temporary staff.   From humble beginnings of only one office in Bow, East London the firm now has three offices along the A10 corridor and a further office in Bishops Stortford near Stansted Airport.  
Breeze & Wyles Limited has gone from strength to strength, riding out several recessions over the 100 year period.   The name may have changed from Breeze & Wyles, to Breeze & Wyles Solicitors LLP and now Breeze & Wyles Solicitors Limited but one thing that has remained however, is our aim to provide the very best in legal advice and customer service.  The excellence of advice and provision of an efficient legal service means that we are the firm of choice for both the private individual and the corporate client. 
There have been many changes in the legal profession in the last century but Breeze & Wyles have used this as a tool to create new processes and procedures, such as innovative IT, enabling them to meet the challenge of the ever changing legal field. 
Brendan O'Brien, Chief Executive of Breeze & Wyles Solicitors Limited, on the firm reaching its centenary said: “The fact that Breeze & Wyles is 100 years old is based on three features; management embracing changes in the legal profession including technological developments in the delivery of client service, the combination of quality, dedication and accuracy of staff and the loyalty of the business’ clients and customers.. I would like to thank the staff of Breeze & Wyles both past and current for the efforts that they have made to the success of the business. I also take this opportunity to thank existing and past customers of the business for their loyalty and custom.”

Breeze & Wyles incorporates today

With effect from today the 1st of April 2014 the business of Breeze & Wyles Solicitors LLP has been transferred to Breeze & Wyles Solicitors Limited. All client relationships will be transferred to the new company. Apart from the name of the firm of solicitors handling your transaction nothing else will change.
The opportunities arising from the Legal Service Act 2007 have required the firm to change it structure so that it can take full control of the strategic direction and vision of the business and create a culture that places the client at the heart of everything we do.
The Management Team consists of: -
Adrian Toulson – Risk Director – adrian.toulson@breezeandwyles.co.uk
Brendan O’Brien – Managing Director – brendan.obrien@breezeandwyles.co.uk
John Appleton – Director/Residential Conveyancing – john.appleton@breezeandwyles.co.uk
Murray Fraser – Operations Director – Murray.fraser@breezeandwyles.co.uk
If you wish to find out more about the changes and how they will enhance what we already do, or what we can do for you please contact me on 01992 526430.

Business and pensioners come out on top in Osborne’s Spring budget

Comment by Brendan O’Brien; Managing Director Breeze & Wyles Solicitors LLP
UK business has been offered a hand-up in the latest statement from Chancellor George Osborne, with a package of measures designed to further stimulate the economy.
This year’s Spring budget was made against a radically different background to 12 months ago, when the Office for Budget Responsibility had downgraded the 2013 growth prediction to just 0.6%. This year, however, the Chancellor was able to announce a growth target of 2.7%, and 2.3% next year, higher than previously forecasted by the Office for Budget Responsibility.
Headlines for individuals included raising the personal allowance for income tax to £10,500 next year and capping of fuel duty.
But much of the focus of George Osborne’s Spring Budget 2013 was on measures aimed at stimulating business in Britain. These included:
• A doubling of the annual investment allowance to £500,000 a year, in a significant move which will cost the Treasury £2billion
• A £7bn package designed to cut energy bills for British manufacturers
• Funding to support 100,000 more apprenticeships for small businesses
• A three-year extension for business rate discounts and enhanced capital allowances in enterprise zones
For pensioners and those coming up to retirement the story was designed to cheer, as was an announcement that duty on alcohol would be held at current rates. For pensioners, there is a relaxation of the rules regarding how a pension pot is converted into income. Now there’s the freedom to drawdown a pension pot at retirement, with complete freedom as to how it is invested, instead of being forced to buy an annuity. There was also the announcement of a new pensioners’ bond savings scheme from January to all people over 65, paying interest rates of 2.8% for one-year bonds and 4% for three-year bonds.
And for all savers, there’s a simplification on ISAs, enabling stocks & shares and cash ISAs to be merged into one pot, with an increased annual savings limit of £15,000.
Turning his eye to tax avoidance and loopholes in the corporate world, the Chancellor announced that HM Revenue and Customs would be given more power to collect outstanding tax debts and he also dramatically reduced the level at which 15% stamp duty is levied on residential property purchased through a company, often called a corporate envelope. With effect from midnight on Budget Day, the 15% rate became payable on all properties from £500,000 upwards; the starting point was previously £2million.
Also announced was an extension of the Help to Buy scheme that is intended to help people to get on the home-ownership ladder and stimulate the construction industry.
ENDS
Web site content note:
This is not legal advice; it is intended to provide information of general interest about current legal issues.

Landlords: what to do (or not to do) if your tenant abandons the premises?

In the current economic climate, an increasing number of landlords are faced with tenants who vacate premises and stop paying rent with little or no warning.
How a landlord should react in this situation depends on what they hope to achieve. From the moment a landlord realises that the premises have been abandoned, their actions can have important and potentially costly consequences for that landlord. Before deciding how to react, the landlord should consider whether it is worth ‘keeping the tenant on the hook’ for ongoing rent and other liabilities under the lease. This may depend on whether the tenant is solvent. There may well not be much point in the cost and time involved in pursuing an insolvent tenant for outstanding and ongoing liabilities.
If the tenant is solvent and worth pursuing for breach of contract or for rent arrears and future rent payments, then the landlord will wish to avoid behaving in a way which could (together with the tenant’s actions) be taken to be a surrender of the lease ‘by operation of law’, thus letting the tenant off the hook for ongoing liability. The landlord may wish to ensure they behave in a way consistent with the continuance of the lease and thus preserve the right to pursue the tenant for rent payments until another suitable tenant is found.
Consequences of surrender of a lease by operation of law
The consequences of a surrender by operation of law include the following:
1. The tenant is released from its obligation to pay future rent.
2. Many leases provide for the payment of a service charge estimate by the tenant, to be followed by a ‘balancing’ payment at the end of each service charge year should the actual service charge due be higher. The landlord will not be able to recover a balancing payment that falls due after the date of surrender, unless the lease provides otherwise.
3. The parties do however remain liable for any breach of covenant and arrears prior to the surrender date.
How a surrender by operation of law comes about
A surrender by operation of law will take place only if the tenant and the landlord both behave in a way towards each other that is clearly and unequivocally inconsistent with the continuation of a lease. A surrender by operation of law cannot be one sided. The tenant must be seen to have surrendered the lease, and the landlord to have accepted the surrender. After such behaviour either party would be ‘estopped’ from then arguing that the lease continues.
By abandoning premises, taking their fixtures and fittings and handing or posting the keys back to the landlord, the tenant could, depending on the overall circumstances, be deemed to have behaved in a way that is inconsistent with the continuance of their lease. This is especially so if, for example, the tenant writes to the landlord confirming that it can no longer pay rent and no longer wishes to remain at the premises. However, this is not enough by itself to result in a surrender by operation of law.
It is what the landlord does in response to this that is critical.
It is the parties’ behaviour that is important, not their intent. A surrender by operation of law can occur irrespective of, or even despite, the intention of the parties. So landlords must be especially careful not to inadvertently accept a surrender where they have no intention of doing so.
Does it matter?
The landlord should consider at the outset what it wants to achieve, and what it is realistic to expect to achieve.
The landlord may want the tenant’s liability to continue, and so he can sue the tenant for future rents. This is more likely where the lettings market is weak and the prospect of finding a new tenant quickly and at the same rent is poor. This can matter more where the tenant vacates early in the lease term.
The landlord may have committed to carrying out extensive maintenance and repair works to the building or estate containing the premises. Therefore, it will want to be able to recover the balance of the service charge due from the tenant for the remaining part of the service charge year.
However, the most practical point to consider is whether the tenant is worth pursuing for any arrears in rent, service charge and any other monies due under the lease. They may have become insolvent, or have applied to the court for an administration order which would automatically restrict the landlord’s ability to bring a claim. Or a corporate tenant may simply have been dissolved. In these cases the landlord may decide that the loss of entitlement to make a claim is irrelevant, and that it is preferable to accept the surrender, regain possession of the property and deal with it freely.
If, on the other hand, the landlord does wish to preserve its claim against the tenant for future rents and liability for other obligations under the lease, it should take care not to act in a way which would constitute acceptance of a surrender.
How easy is it to prove surrender by operation of law?
Case law has confirmed that the threshold for confirming that the landlord has accepted a surrender by operation of law is high. In other words, the fact that his behaviour in this respect must be unequivocable means that usually it is not easy for a party to prove a surrender has been accepted.
This has been highlighted in a case heard by the Court of Appeal case in June this year. The landlords let a builders yard to a company (Co 1) that became insolvent and ceased operating from the yard. Another company (Co 2) took occupation, started paying rent and began negotiating a new lease with the landlord. Negotiations broke down and the administrative receivers for Co 1 agreed to assign their lease to Co 2. The landlord argued that Co 1’s lease had been surrendered by operation of law, Co 2 occupied under a tenancy at will and that the tenancy at will was now terminated. The Court of Appeal ruled that Co 1’s conduct was not “unequivocally inconsistent with the continuance of the lease” and that there was no surrender by operation of law. This was despite Co 1 making it clear that they wanted nothing more to do with the lease, ceasing to pay rent and knowing a third party was negotiating a new lease, and despite the landlord acknowledging this by negotiating a new lease with Co 2.
Even though this and other cases have shown that the test for surrender by operation of law is a difficult one to prove, landlords still need to be careful. They would do well to have in mind the distinction between actions which are likely to constitute acceptance of surrender and those which are not. Examples of behaviour which could apply in either case are set out below.
Actions which are likely to amount to an acceptance of a surrender
• Taking possession of the premises. A landlord can do this by moving into the property and occupying it for the landlord’s own purposes.
• Redecorating the property to its own taste and allowing family members or friends to occupy the premises for their own purposes.
• Moving items into the property for storage.
• Re-letting to someone else with the tenant’s consent.
Actions which when TAKEN ALONE in each case are unlikely to amount to an acceptance of a surrender
• Receiving the keys back without demanding them, for example, where delivered in the post or by hand through a letter box.
• Entering the premises to inspect and repair. This is consistent with the rights the landlord would already have during the lease term.
• Carrying out repairs and taking security measures to protect the property against intruders and to preserve the value of the landlord’s interest.
• Failing to demand rent and service charge when the landlord knew the tenant no longer wants the lease. Mere inaction alone is usually not enough to constitute unequivocal acceptance of a surrender.
• Case law suggests that the landlord could reasonably be entitled to mitigate his losses by , in addition to any of the above actions, preparing to relet the property without this necessarily amounting to an acceptance of a surrender. However, it is not clear to what extent remarketing and finding a new tenant would jeopardise the landlord’s claim against the tenant. A court would consider each case on its facts, and advice should be sought before reletting as to whether this may affect the landlord’s claim for future rents.
A court will consider all of the landlord’s actions taken together in deciding whether the landlord has accepted the surrender. The landlord should therefore try to do only what is necessary to secure, repair and protect the property and then, subject to seeking appropriate advice, to try to find a new tenant if needs be. The key thing is not to be seen to be taking back possession of the property.
An example of this risk is illustrated by a 2009 case where the Court of Appeal confirmed a surrender by operation of law had occurred when after a tenant had abandoned premises, the landlord took back the keys, redecorated and occupied the property for six weeks.
Merely writing to the tenant asserting that the lease continues and that rent remains due, is not enough to prevent a surrender by operation of law, especially if accompanied by an action which is likely to constitute an unequivocal acceptance of surrender.
One point that does not appear in its own right to have been clearly settled in case law, but which is in our view could matter, is the timing of a landlord’s claim in tandem with other action it takes. If the landlord makes a claim against the errant tenant for future rent and service charge or other breach, whilst or before taking steps to protect the property, it may be easier for him to argue that he has not accepted a surrender than if he waits until after taking those steps. However, this is not guaranteed, and any case argued in court will be taken on its own facts.
Hannah Collins

Solicitor

Commercial Property

Benefits in Kind and the use of LLPs

A recent tax decision could spell trouble for limited liability partnerships.
In the case the First Tier Tribunal was asked to decide
(1) Whether the provision of motor cars leased and owned by the LLP and car fuel to its partners was taxable as a benefit in kind on the Directors of the main business (‘Company’) by reason of their employment as directors of the Company; and
(2) Whether the provision of motor cars leased and owned by the LLP and car fuel to the members of the LLP is chargeable as a benefit in kind by reason of their employment as directors of the Company and therefore is subject to Class 1A National Insurance Contributions.
HMRC had taken the view that the Directors of the Company had the use of their cars because of their employment as directors of the company, not because they were members of the LLP. It argued that the relationship between the LLP and the company were not ‘at arm’s length’ and that the provision of the cars within the LLP was not necessary to its business, indeed it was unclear what that business was. Both of these factors, the HMRC argued, supported its view that the arrangement was artificial and the provision of the cars and car fuel to the directors was subject to Class 1A National Insurance liabilities.
The First-tier Tribunal commented as follows:
(1) The provision of motor cars leased and owned by the LLP and of car fuel to its members is taxable as a benefit in kind on the Directors of the Company by reason of that person’s employment as a director of the Company;
(2) Such provision of motor cars leased and owned by the LLP and of car fuel to its members is chargeable as a benefit in kind and therefore is subject to Class 1A National Insurance Contributions.
Brendan O’Brien Corporate lawyer and Managing Director of Breeze & Wyles Solicitors LLP said: “If this case is not challenged or appealed then directors and owners of companies need to be extremely careful how they deal with ownership of cars and the locking away of benefit in kind. Failure to deal with these issues properly could have disastrous implications with the HMRC able to recover unexpected tax liability from directors personally.”

Tip sheet 3, What can you do when you hear a debtor is insolvent

What can you do with an insolvent debtor?

More frequently, we are approached by clients who have “heard” that their debtor is insolvent. It might be that the business has heard this on the grapevine, or that they have heard informally from the debtor. Alternatively, a business might have received formal notification from an appointed insolvency practitioner.

Insolvency Jargon

There are a number of different types of corporate insolvency and a great deal of “jargon” which sometimes causes confusion for creditors. The most common phrases you will hear are “administration” and “liquidation”. This fact sheet focuses on these two areas of corporate insolvency.

Administration

If a business is in administration, it means that an administrator has been appointed to replace the directors for the purpose of “assessing” whether the Company can be rescued; whether the company or its assets should be sold; or whether the company should be wound up.

Whilst a Company is in administration, a moratorium exists which prevents creditors from pursuing a claim against the Company, without the authority of the Court or the administrator. The purpose of the moratorium is to protect the assets of the Company whilst the administrator is deciding whether the Company can be rescued or not. The moratorium lasts for the duration of the administration. The administration will come to an automatic end after 12 months unless the creditors, or Court, agree to a further extension of up to 6 months.

The administrator is an officer of the Court and as such, must act in the best interest of all creditors generally. Within 8 weeks of appointment, the administrator will make proposals to creditors, for achieving the purpose of administration. In the majority of cases, within 10 weeks of appointment, the administrator will also hold a meeting of the creditors. The purpose of the meeting is to enable the creditors the opportunity to vote in favour, or against, the administrator’s proposals.

What should you do if a debtor is placed in to administration?

Upon discovering that a debtor is in administration, you should ensure that the administrator is aware of the debt! It sounds obvious, but it is dangerous to assume that your debtor has recorded all unpaid invoices on its accounts package. Therefore, you should inform the administrator of the debt to ensure that you receive the administrator’s proposals and details of the creditors meeting.

If an administrator has been appointed, the appointment should be registered with Companies House. Therefore, if the debtor will not disclose details of the appointed administrator, you can find details of the administrator at Companies House.

Once you have proved your debt to the administrator, there is little else you can do pending conclusion of the administration. In reality, it is highly unlikely that unsecured creditors will receive any payment during the period of administration. If at the end of the administration, the administrator places the company in to liquidation, you might receive something towards the debt following the liquidator’s appointment. Whether you will receive a payment, and how much you receive, will however depend on whether there is any money “left in the pot” following payment to secured and preferential creditors.

You should of course take advice from your accountant regarding the impact on your accounting obligations, following the debtor’s administration.

Liquidation

A business may be wound up / placed in to liquidation, in one of three ways:
1. By a shareholder resolution (this should only happen where a Company is solvent); Members Voluntary Liquidation.
2. By creditors application to wind up a Company due to the Company’s inability to pay its debts; Creditors Voluntary Liquidation.
3. By Order of the Court, Compulsory Liquidation.

The liquidator will take control of the Company’s assets and his / her primary duty is to realise assets and distribute to the creditors according to a specific order of priority.

In the case of a Compulsory Liquidation, the Official Receiver will be appointed to investigate the causes of the Company’s failure. The Official Receiver will call a Meeting of Creditors within 4 months from the date of the winding up order. At least 21 days notice of the meeting must be given to the Court and to all Creditors. The notices issued will inform the creditors of the date by which a proof of debt and proxy must be lodged, in order for the creditor to vote at the meeting.

Once the distribution to creditors has been completed, the Company will be dissolved.

What should you do if a debtor is placed in to liquidation?

Upon discovering that a debtor is in liquidation, you should ensure that the liquidator is aware of the debt! It sounds obvious, but it is dangerous to presume that your debtor has recorded all unpaid invoices on its accounts package. You will need to lodge a formal proof of debt with the Liquidator if you are to be able to vote at the creditors meeting and / or receive any distribution throughout the liquidation process.

If a liquidator has been appointed, the appointment should be registered with Companies House. Therefore, if the debtor will not disclose details of the liquidator, you can find details of the liquidator at Companies House.

Whether you will receive a payment, and how much you will receive, will depend on how much is left once the liquidator has paid out debts in accordance with the statutory order of priority.

You should of course take advice from your accountant regarding the impact on your accounting obligations, following the debtor’s administration.

Avoiding Insolvency

Whilst you will not completely avoid the risk of an insolvent debtor, you substantially increase the likelihood of your debtor becoming insolvent with every day that passes following non-payment of an invoice. The key is to be proactive in your credit control process and to ensure that there is no unnecessary delay in appointing a Solicitor following exhaustion of your credit control process.

I would recommend that our low cost debt recovery service, which enables you to send a letter to a debtor threatening Court action for £2.00 plus VAT, be seen as an automatic extension of your debt recovery process. In other words, the moment your letter cycle has been exhausted, I would recommend that you instruct us to send a letter to your debtor, so that continued pressure is applied.

Many companies are juggling debts and paying those creditors that “shout the loudest”. Your debtor may however, get to the point where it can no longer juggle debts and therefore, insolvency is unavoidable. To limit this risk, I would recommend sending a letter before action / issuing Court proceedings, through our service, in order to add volume to encourage your debtor to prioritise your debt before it is too late.

To receive further fact sheets or for further information about our commercial debt recovery service, please contact Rita Wright of Breeze and Wyles Solicitors on 01992 558411


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Innovating companies can gear up for clever tax benefits

Innovating companies can now maximise the advantageous tax regime that’s been brought in for patented products.

The Patent Box tax regime came into effect in April and it gives companies a reduced 10% corporation tax rate on the proportion of profits derived from the exploitation of patents.

It applies to patents granted by the UK Intellectual Property Office, the European Patent Office or certain other specified EEA countries.

First announced in 2010, the reduced corporation tax rate is designed to encourage businesses to develop and actively exploit patents, rather than sitting on intellectual property (IP) as often happens. The new regime will be phased in over the next four years, with tax savings gradually rising from 60% of potential benefits in year one to the full 100% from April 2017.

The Government has introduced the Patent Box to encourage innovative businesses to invest in the UK and say it should improve the competitiveness of the UK tax system for high-tech companies.

Companies can only benefit from the Patent Box if they are liable to Corporation Tax and make a profit from exploiting patented inventions; they must also own or hold an exclusive license for the patents and must have undertaken qualifying development on them.

But there are opportunities for companies beyond the original patent, as the tax relief is going to be available for profits on whole products, even where the patented item is only a small part of that whole. It is also going to extend to profits earned worldwide, even if the product is patented in just the UK.

As well as providing relief on IP income, the tax relief will also be allowed on license fees received on a patented product or process.

The other bonus for companies is that the Patent Box relief can be backdated to profits earned up to six years prior to the granting of the patent. This should help fund the cost of patenting where there is a short lifespan on a product.

Because it does not apply to non-exclusive licenses, exclusive licenses falling within the Patent Box will be far more valuable to potential licensees. The tax relief can also be claimed for related non-patent IP, such as trademarks and registered designs, so they do not need not be exclusively licensed.

Explained corporate law expert Brendan O’Brien: “There is scope for companies with activities that would not currently fall within the Patent Box to review their strategy and if necessary to modify their activities so that they qualify - although, as with all things, everyone needs to weigh up the admin burden of opting in to such a scheme.”

He added: “It’s a complex area, but any company involved in innovation and patenting should be reviewing what they are currently doing and looking how they might benefit from the new regime.”