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:
–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 project that 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
Phil Louch
Wakefield 18 March 2013
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
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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.
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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
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The Patent Box – overview

10% corporation tax rate on profits attributed to patents;
phasing in from April 2013
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The Patent Box – overview

10% corporation tax rate on profits attributed to patents;
phasing in from April 2013

UK, EPO & certain other patents
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The Patent Box – overview

10% corporation tax rate on profits attributed to patents;
phasing in from April 2013

UK, EPO & certain other patents

Profits from a wide range of worldwide income: licensing;
patented products and services
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The Patent Box – overview

10% corporation tax rate on profits attributed to patents;
phasing in from April 2013

UK, EPO & certain other patents

Profits from a wide range of worldwide income: licensing;
patented products and services

Applies to profits before interest costs
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The Patent Box – overview

10% corporation tax rate on profits attributed to patents;
phasing in from April 2013

UK, EPO & certain other patents

Profits from a wide range of worldwide income: licensing;
patented products and services

Applies to profits before interest costs

After deducting a routine return on certain costs and a
marketing profit if applicable
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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.
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The Patent Box – calculating the profit
Corporation Tax Profits Before Interest etc.
22%
22%tax
tax
22% tax
10% tax
22% tax
< Unpatented products
< Routine return
< Marketing return
< Qualifying
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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).
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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.
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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
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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.
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The Patent Box – example
1. Total gross income
£60m
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The Patent Box – example
1. Total gross income
£60m
2. Calculate the % of total gross
income that is relevant IP income.
Relevant IP income = £48m
(48m/60m) x100 = 80%
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The Patent Box – example
1. Total gross income
£60m
2. Calculate the % of total gross
income that is relevant IP income.
Relevant IP income = £48m
(48m/60m) x100 = 80%
3. Calculate the proportion of taxable
trade profits attaching to RIPI.
Tax adjusted trading profits = £11m
Further adjustments = add £2m
80% x £13m = £10.4m
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The Patent Box – example
1. Total gross income
£60m
2. Calculate the % of total gross
income that is relevant IP income.
Relevant IP income = £48m
(48m/60m) x100 = 80%
3. Calculate the proportion of taxable
trade profits attaching to RIPI.
Tax adjusted trading profits = £11m
Further adjustments = add £2m
80% x £13m = £10.4m
4. Deduct the routine return figure
giving you the qualifying residual profit.
Routine return = (£15m x 10%) x 80%
= £1.2m
QRP = £10.4m - £1.2m = £9.2m
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The Patent Box – example
1. Total gross income
£60m
2. Calculate the % of total gross
income that is relevant IP income.
Relevant IP income = £48m
(48m/60m) x100 = 80%
3. Calculate the proportion of taxable
trade profits attaching to RIPI.
Tax adjusted trading profits = £11m
Further adjustments = add £2m
80% x £13m = £10.4m
4. Deduct the routine return figure
giving you the qualifying residual profit.
Routine return = (£15m x 10%) x 80%
= £1.2m
QRP = £10.4m - £1.2m = £9.2m
5./6. Calculate the small claims amount
or deduct the marketing assets return
figure to arrive at the relevant IP profit.
Marketing assets return figure = £nil
Relevant IP profit = £9.2m
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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
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The Patent Box – phasing in of benefits
10% corporation tax rate will be phased in over first five years:
Tax year
Proportion of full benefit
available
2013/14
2014/15
2015/16
2016/17
2017/18
60%
70%
80%
90%
100%
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
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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.
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The Patent Box – streaming example
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
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The Patent Box – streaming example
Formulaic
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
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The Patent Box – streaming example
Formulaic
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
100
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The Patent Box – streaming example
Formulaic
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
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The Patent Box – streaming example
Formulaic
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’) (500:500 50%)
95
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The Patent Box – streaming example
Formulaic
£
Sales (500~IP, 500 Non-IP)
1000
Cost of raw materials
(700)
Loan relationship debits
(50)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’)
Streaming
£
95
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The Patent Box – streaming example
Formulaic
£
Streaming
£
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’)
(70)
95
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The Patent Box – streaming example
Formulaic
£
Streaming
£
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’)
(70)
95
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The Patent Box – streaming example
Formulaic
£
Streaming
£
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’)
(70)
(7)
95
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The Patent Box – streaming example
Formulaic
£
Streaming
£
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
(100)
Staff costs (all needs marking up)
(100)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
Add: loan relationship debits
100
Adjusted Profits
190
Relevant IP profit (‘RP’)
(70)
95
(7)
323
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The Patent Box – streaming example continued
Relevant IP profit
Formulaic
£95
Streaming
£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.
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The Patent Box – other features
R&D shortfall
.
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
Benefits for up to a 6 year period are given only when patent is
granted. Elect on a patent by patent basis.
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
Benefits for up to a 6 year period are given only when patent is
granted. Elect on a patent by patent basis.
Relevant IP loss
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
Benefits for up to a 6 year period are given only when patent is
granted. Elect on a patent by patent basis.
Relevant IP loss
Not to confuse with a company’s normal trading loss.
Must be set off against RP of other group members or future RP of
the company. Set off rules make compensatory payments tax-free
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
Benefits for up to a 6 year period are given only when patent is
granted. Elect on a patent by patent basis.
Relevant IP loss
Not to confuse with a company’s normal trading loss.
Must be set off against RP of other group members or future RP of
the company. Set off rules make compensatory payments tax-free
Partnerships
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The Patent Box – other features
R&D shortfall
May be relevant for the first 4 years of electing in if R&D costs
decline after the company’s patent portfolio starts to produce income.
Pre-grant profits
Benefits for up to a 6 year period are given only when patent is
granted. Elect on a patent by patent basis.
Relevant IP loss
Not to confuse with a company’s normal trading loss.
Must be set off against RP of other group members or future RP of
the company. Set off rules make compensatory payments tax-free.
Partnerships
Corporate partners can separately elect.
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Further help
• Companies with CRMs or CCs: contact your CRM or CC in the first instance.
• Other companies should contact:
Patent Box and R & D Specialist Unit
Medvale House
Mote Road
Maidstone
Kent
ME15 6AF
Tel: 01622 760 405
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