Tax Reliefs for Innovative Companies – Patent Box and R&D Tax Relief

The Patent Box

From 1 April 2013 companies that make a profit from the exploitation of patents will Patent Boxbenefit from a reduced rate of Corporation Tax.

The reduced rate of Corporation Tax will eventually be as low as 10% by April 2017, but will be phased in from 1 April 2013. The reduced rate will be achieved by way of an enhanced Corporation Tax deduction.

Definition of Patent for these Purposes

i) Patent granted by the UK Intellectual Property Office or European Patent Office or certain other EEA qualifying patent jurisdictions; or

ii) Rights similar to patents relating to human and veterinary medicines, plant breeding and varieties.

Ownership Conditions

In order to qualify for the reduced rate of Corporation Tax the following conditions must be met:

  • Patents must be owned or licensed-in on exclusive terms
  • The group in which the patent is owned must have played a significant part in the patents’ development or a product which incorporates the patent
  • If the patent has not been self-developed the company holding the patent must actively manage its portfolio of patents

Relevant IP Profit

The profits to which the reduced rate of Corporation Tax is applied are the ‘relevant IP’ profits.

The ‘relevant IP profit’ is broadly speaking the proportion of taxable trade profits (TTP) relating to qualifying patents and Intellectual Property (IP), less a deduction for brand and marketing profits and a 10% deduction to represent routine costs such as premises, employees etc.

Valuation issues may come into play in relation to calculating the deduction for brand/marketing profits.

How Can Eaves & Co Help?

  • Provide advice regarding the conditions and availability of the patent box
  • Provision of computations and accompanying report to be included in the Corporation Tax return
  • Valuation support where the computations include a deduction for notional marketing royalty

Research & Development Expenditure

Qualifying Expenditure

R&D tax relief is available where a company seeks to achieve an advance in overall knowledge or capability in a field of technology or science through the resolution of scientific or technological uncertainty.

R&D expenditure is not limited to laboratories, with innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media qualifying for relief.

For qualifying expenditure the following reliefs are available:

1. Enhanced Corporation Tax Deduction

For SMEs the enhanced deduction is equal to 225% (200% before 1 April 2012) of the qualifying R & D spend, and for large companies the deduction is equal to 130%.

This enhanced deduction is only available on revenue costs directly related to the R&D such as staff costs, materials, utilities and software.

2.Tax Credit

If the company is loss making then it is possible to surrender the loss for a tax credit.

The tax credit is equal to 11% of the lower of (i) 225% of Qualifying R & D expenditure, and (ii) the unrelieved trading loss in that period.

Example

If an SME spends £100,000 on qualifying R&D then it will be entitled to a deduction from taxable profits of £225,000.

If the above the company makes a loss of £300,000 the company can surrender the loss for a tax credit.

The tax credit is equal to £225,000 x 11% (lower of £225,000 & £300,000) which is £24,750.

The loss carried forward will be restricted by the loss surrendered, in this case to £75,000 (£300,000 – £225,00).

Over 88% of Eligible Companies Not Making Full Use of the Research & Development (R&D) Tax Relief

According to a recent study by Chantrey Vellacott DFK  Accountants, only 17,000 out of 150,000 potentially qualifying companies that undertake research and development activities are making claims for R&D tax relief.

It is suggested that the low take up of R&D tax relief may be as a result of a misconception that R&D only takes place in laboratories, which means innovative work and problem-solving in many other industries, such as construction, logistics design engineering, manufacturing and new media, can be easily missed.

Companies that undertake qualifying R&D expenditure are eligible for an enhanced Corporation deduction equal to 225% of the R&D expenditure for SMEs and 130% for large companies.

If an SME makes a loss and incurs R&D expenditure in the year, it is possible to surrender some of the loss for tax credit payment equal to 11% of the lower of 225% of R & D expenditure and the loss.

Therefore these reliefs are extremely beneficial for the companies involved.

If you would like more information on R&D tax reliefs including details of what qualifies as R&D please contact a member of the Eaves & Co team.

Research & Development (R&D) Project – The R&D Claim Process

A recent Eaves and Co project involved helping a client prepare a claim for their Research and Development (R&D) Expenditure. Small and medium companies are able to benefit from a deduction of 200% (2011/12) and 225% (2012/13) of the qualifying expenditure.

The initial stage in the process was determining whether the research and development undertaken qualifies for a claim for a deduction from their taxable profits. In order for the expenditure to qualify, the research and development undertaken must aim to solve a scientific or technological uncertainty and not just find evidence to support previous conclusions. We interviewed the individual who is responsible for R&D and formed a ‘product matrix’ of all the products worked on and why the work qualified as R&D.

Once it had been decided that the client’s research and development qualified for the deduction, Eaves and Co gathered the information required, for example expenditure on gas, water and electricity as well as staff costs and materials specifically relating to the research and development undertaken.

The next step involved determining whether the client would be classed as a large or small/medium company and calculating the tax reduction/saving that they would benefit from. This entailed applying the company in question to the legislation on R&D in areas such as the criteria for small and medium companies and the criteria surrounding the number of employees, and the annual turnover and balance sheet figures.

The final part of the project involved the preparation of the R&D calculations and the supporting paperwork to the claim. This also involved liaising with the company’s accounts department and auditors to ensure that the claim was reported in the correct manner.

On this occasion, Eaves & Co were able to help the client save nearly £60,000 in their R&D claim.

Top Tax Tips for Owner Managed Businesses – Tip 3 – R&D Tax Relief

Top Tax Tips for Owner Managed Businesses

3. R&D tax relief

For small and medium size companies, relief is available for qualifying costs incurred on Research and Development (R&D) at 200%, (increasing to 225% from 1 April 2012).

This means that for every £100 spent on qualifying expenditure the company should receive a deduction for corporation tax purposes of £200.

For loss making companies a tax credit/refund is available to give a cash flow advantage.

When making a claim for R&D tax relief, it is important to ensure that the activities qualify as Research and Development.

This is the subjective area of making an R&D credit claim and our policy is to draft a document as part of our claim which supports the activity as R&D.  It may be possible for us to prepare a claim with a contingent element for fees.

Research and Development and Patent Box

The Budget announced some significant and beneficial changes to R&D Tax Credits:-

– The rate of credit available has been significantly increased

-More companies will be able to access credits as the lower spending threshold is removed

However, what is also important for innovative companies is the new “Patent Box”

This is a 10% rate of tax for companies after April 2013 on patents that are brought into use now

For more information call Eaves & Co Leeds, on 0113 2443502