Ian Taylor. Wakefield Enterprise Partnership. Research and Development (R&D) Tax Relief Phil Louch (A very brief overview!). SME Tax Relief. Qualifying revenue expenditure is enhanced at a particular rate The rate depends upon the date on which the expenditure was incurred:
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SME Tax Relief • Qualifying revenue expenditure is enhanced at a particular rate • The rate depends upon the date on which the expenditure was incurred: • 1 Aug 2008 to 31 Mar 2011 = 75% • 1 Apr 2011 to 31 Mar 2012 = 100% • From 1 Apr 2012 = 125% • Enhancement is then deducted in the Corporation Tax computation
Payable Tax Credit (cont.) • The rate of the payable tax credit depends upon the date on which the expenditure was incurred: • 1 Aug 2008 to 31 Mar 2011 = 14% • 1 Apr 2011 to 31 Mar 2012 = 12.5% • From 1 Apr 2012 = 11% • Tax credit is capped at the amount of PAYE & NICs liabilities for the period • The PAYE & NICs restriction has been removed for accounting periods ending on or after 1 April 2012.
The definition of R&D • A projectthat seeks to achieve an advance in science or technology (not arts or humanities) through the resolution of scientific or technological uncertainties
What is an advance? • Must represent an advance in the overall knowledge or capability in a field of science or technology • not a company’s own state of knowledge or capability alone • Can be an appreciable improvement to an existing process, product etc
Qualifying Revenue Expenditure • Staffing costs • Consumable items • Subcontract costs. • Generally 65 % of the costs attract relief • Externally provided workers • Generally 65 % of the costs attract relief.
Making a Claim • Identify the R&D project • Determine the start and end dates of the R&D project • Establish the qualifying activities within the project • Quantify the expenditure relating to those activities. • Claim must be made in a CT return
Where to get help • HMRC website - www.hmrc.gov.uk • BIS website • Specialist units See page 80350 of the CIRD ( Corporate Intangible Research and Development) Manual located on the HMRC Website. • R&D Webinar - See R&D page of HMRC website
The Patent Box - context • “The Patent Box is a key initiative to make the UK tax regime competitive for innovative high-tech companies.” • David Gauke, Exchequer Secretary to the Treasury • The Patent Box forms part of the wider programme of corporation tax reforms, including: • Reductions in the main rate of corporation tax • Changes to the UK’s Controlled Foreign Company regime • Foreign branch exemption • Reforms to the taxation of intellectual property (IP) including R&D tax credits
Patent Box - aims • To encourage investment in the UK by: • Providing an additional incentive for companies in the UK to retain and commercialise existing patents and to develop new innovative patented products here; • Encouraging companies to locate the high-value jobs associated with the development, manufacture and exploitation of patents in the UK; And • To maintain the UK’s position as a world leader in patented technologies.
Patent Box – legislation and guidance • Introduced by Finance Act 2012 following extensive consultation • Part 8A Corporation Tax Act 2010 (profits arising from the exploitation of patents etc) • Commences 1 April 2013 • Summary guidance:www.hmrc.gov.uk/patentbox • Full guidance in CIRD manual:CIRD200000+ • Further help: see last slide
The Patent Box – ownership requirements • 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 patent’s development or the development of a product which incorporates it. • The company in the group holding the patent must actively manage its portfolio of qualifying patents if the patent is not self-developed. • What do we mean by ‘patent’? • Patent granted by the UK IPO or EPO or certain other EEA qualifying patent jurisdictions; or • Rights similar to patents relating to human and veterinary medicines, plant breeding and plant varieties.
The Patent Box – calculating the profit Corporation Tax Profits Before Interest etc. < Unpatented products < Routine return < Marketing return < Qualifying 22% tax 22% tax 22% tax 10% tax 22% tax
The Patent Box – calculating the ‘relevant IP profit’ • Normal apportionment rules • First stage • 1. Calculate the total gross income of the trade for the accounting period. • 2. Calculate the percentage of total gross income that is relevant IP income. • 3. Calculate the proportion of taxable trade profits attaching to RIPI. • Second stage • 4. Deduct the routine return figure to get the qualifying residual profit (QRP). • Third stage • 5. Calculate the small claims amount, or • 6. Deduct from QRP the marketing assets return figure (if any) to arrive at the relevant IP profit (or relevant IP loss).
The Patent Box – first stage - total gross income • Includes: • Company’s turnover, i.e. revenues recognised under GAAP. • Damages, insurance proceeds, or other compensation. • Excludes: • Finance income, • i.e. trading loan relationship credits such as interest income and foreign exchange gains.
The Patent Box – first stage - relevant IP income • There are five heads of relevant IP income • Head 1: income from sale of products incorporating patents. • Head 2: patent royalties and other income from licensing patents. • Head 3: income from sale of patents. • Head 4: damages for infringements. • Head 5: other compensation. • In addition: • Notional Royalties: patents used in processes and services
The Patent Box - relevant IP income - sales of products • Items in respect of which a qualifying IP right has been granted • (‘qualifying items’). • Items incorporating qualifying items. • Parent Items (items designed to incorporate the above and sold with them). • Items wholly or mainly designed to be incorporated in the above. • An item and its packaging are not to be treated as a single item, unless the packaging performs a function that is essential for the use of the item for the purposes for which it is intended to be used.
The Patent Box – calculating the deduction • Relevant IP profits = £9.2m • Company A has CT profits of £11m, of which £9.2m are patent box profits. • Tax due = (£1.8m x 22%) + (£9.2m x 10%) = £1.32m • Achieved by giving the company an additional CT deduction: • Patent Box deduction = RP x ((MR – IPR)/MR) • = 9.2m x ((22 – 10)/22) • = £5.02m • CT payable = (11m – 5.02m) @ 22% = £1.32m
The Patent Box – phasing in of benefits 10% corporation tax rate will be phased in over first five years: In the previous example, in 2015/16 Patent Box deduction = RP x 80% x (MR – IPR)/ MR = 9.2m x 80% x (22 – 10)/ 22 = £4.01m
The Patent Box - streaming • An alternative method to arrive at the relevant IP profit or loss figure. • Company divides its trading income into two streams and allocates its trading expenses between the two streams on a just and reasonable basis. • May be a mandatory method if certain conditions are met. • Company may wish to stream where the normal apportionment rules are to the company’s disadvantage.
The Patent Box – streaming example continued • Formulaic Streaming • Relevant IP profit £95 £323 • Patent Box deduction RP x ((MR – IPR)/MR) • 95 x ((22-10)/22) 323 x ((22–10)/22) • Patent Box Deduction £52 £177 • Taxable profit without Patent Box £100 £100 • Resultant Adjusted Profit £48(£77) • The loss is a normal trading loss which may be group relieved or carried forward at the full corporation tax rate in the usual way.
