R&D (Research and Development) Tax Credits and the Patent Box Tax Relief

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In the latest UK200Group blog post Paul Hawksley, Managing Partner at TWP Accounting discusses what R&D Tax Credits and Patent Box Tax Relief is and whether UK companies can take advantage of both reliefs at the same time

Both R&D (Research and Development) Tax Credits and the Patent Box Tax Relief have been around for a while and they were introduced by the British government to encourage greater spending by companies on their research and development and on the origination of IP (intellectual property) and its commercial exploitation.

But the question is whether UK companies can actually take advantage of both reliefs at the same time? To answer that question, we must first understand what each one is and what they offer.

What are R&D Tax Credits?

R&D tax credits is a tax relief scheme designed to encourage companies to spend more on R&D. Increased R&D spending leads to more investment in innovation which often secures companies an ongoing competitive advantage.

Using the scheme, a company’s tax bill is reduced by a percentage which is equal to its ‘qualifying R&D expenditure’. Alternatively, this can also be achieved via the payment of a credit which, again, is equal to the qualifying R&D expenditure.

UK companies can only claim R&D tax credits if they are liable to pay Corporation Tax which can be claimed under three schemes:

• The small-medium sized enterprise or SME scheme

• The large company scheme

• The RDEC – Research and Development Expenditure Credits – Scheme

However, as of April 2016, large companies can only take advantage of the RDEC scheme. Furthermore, companies with zero tax liability which claim the expenditure credit can receive ‘cash help’.

Companies with an annual turnover of no more than €100 million and/or gross assets not exceeding €86 million are categorised as SMEs while those over the threshold are categorised as Large Companies.

With that being said, a company may not declare itself to be an SME if it is, in fact, part of a large enterprise which would, when taken as a whole, fail to meet the above qualifying criteria.

However, a SME can claim higher tax relief rate than a large company and if its tax bill cannot be reduced, it can claim ‘cash help’ instead.

What are Patent Box Tax Reliefs?

The UK Patent Box allows companies to take advantage of a lower Corporation Tax rate to profits earned from either patented inventions and/or other equivalent forms of IP (intellectual property).
Companies need to notify HMRC if they need to claim relief under the Patent Box – however, this must be done within 2 years once the accounting period has ended – during which the relevant profits and income were gained.

UK companies can only use a Patient Box tax relief if they are liable to pay Corporation Tax and if they are currently making a profit by exploiting patented inventions. However, there are exceptions to this.

It is not unusual for patent holders to license inventions to others for development. So, for instance, if a UK company holds licenses to use technology developed or owned by someone else, they can still benefit from the tax relief benefits of the Patent Box regime as long as the following conditions are met:

• They have the rights to develop and exploit the patented invention

• The one or more rights they hold are to the exclusion of all parties which includes the licensor

• They have ‘exclusive’ status throughout an entire national territory; rights to manufacture/sell within a city or town in the country does not qualify as ‘exclusive’

The aim of the Patients Box tax relief scheme is to promote R&D as well as innovation across UK companies which in turn would encourage them to commercialise their R&D and patients in the country.

Companies qualify for this tax relief if they own patent licenses in IP rights or if they license the rights exclusively to those patents and if they hold responsibility for qualifying development on the patents. Companies that are part of a group and wish to qualify need to have the group undertake qualifying development on the patent.

Can R&D Tax Credits and the Patent Box scheme be used simultaneously?

Although the two schemes are unique, they can certainly be combined. R&D can definitely attract tax credits and, second, the profits from patents coming directly as a result of R&D can be taxed at a lower percentage.

In our experience, there are hardly any UK company that would knowingly pass up the opportunity to reduce its tax rate by 10% and all the while claim over 220% deduction on its expenditure.

The Patent Box tax regime allows companies who have ownership or licensing rights to registered patents to reduce Corporate Tax on some of the profits by 10% once the regime goes into full effect. And such companies which are also conducting R&D can claim as much as 225% of R&D expenditure as a credit or tax deduction.

In simple terms, this means companies with an active R&D department and/or those involved in Patents should take advantage of both tax relief schemes to significantly reduce their tax liabilities.

To better understand some of the complexities around R&D tax reliefs and the Patent Box regime, you will need to consider the following:

• Review your R&D activities and expenditures to see which are eligible for tax relief

• Report on R&D activities and expenditure which qualify for HMRC submission

• Negotiate with HMRC when the R&D claim is made

• Your tax adviser can also provide bespoke advice on:

• The success ratio and viability of an R&D claim

• Record keeping requirements that revolve around R&D tax reliefs

• Qualifying expenditure details

• Structuring your accounting systems to make the claim process more efficient

Paul Hawksley, Managing Partner at TWP p.hawksley@twpaccounting.co.uk

Tags: UK200

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