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

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Corporation Tax R&D Tax Relief Research & Development The Patent Box

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).