Tax Credits & Patent Box

Dave MounceyPartnerSmith & Williamson LLP

DisclaimerThis seminar is of a general nature and is not a

substitute for professional advice. No responsibility can be accepted for the

consequences of any action taken or refrained from as a result of what is said.

R&D tax credits – what is it worth to you?

• Enhanced tax deductions for qualifying R&D costs to reduce taxable profits or increase tax losses

– For SMEs, tax relief is now 225% of original cost

– For large companies, relief is 130% of original cost (but new rules proposed for on an “above the line” tax credit from 2013)

• Loss-making SMEs can claim payable tax credit of 11% of enhanced deduction (PAYE/NIC restriction abolished for periods ending after 1 April 2012)

SMEs

• Defined by EC

• Fewer than 500 employees, AND

• Turnover up to €100m, OR

• Gross assets up to €86m

• Watch changes in status/years of grace

What is R&D?

“a project that seeks to achieve an advance in science or technology … through the

resolution of scientific or technological uncertainty”

2004 DTI Guidelines on R&D

What is R&D?

• The project may:

– Extend overall knowledge or capability

– Create a process, material, device, product or service that incorporates or represents an advancement

– Make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes

– Use science or technology to duplicate the effect of an existing process, material device, product or service in a new or appreciably improved way

Which costs can be claimed?

• Staff costs

• Consumable and transformable items

• Software

• Subcontracted R&D (SMEs only)

• Externally-provided workers (i.e. through an agency)

• Contributions to qualifying research bodies (large companies only)

Common pitfalls

• R&D lost in accounts

• Capitalised R&D

• Employees/externally provided workers/ subcontractors

• R&D subcontracted in

• Two year time limit missed

• Poor presentation to HMRC

Maximising claims

• Claim can be made annually as part of company tax return

• Claim can also be made within two years of the end of the accounting period

• Letter/report should clearly demonstrate that all conditions are met

• Reduces/eliminates HMRC queries and should avoid penalties

• Claim reviewed by HMRC in specialist R&D units

Patent box regime

“The Patent Box is a key initiative to make the UK tax regime competitive for innovative high-

tech companies”

Exchequer Secretary

Patent box regime

• To encourage innovation in a 'practical and competitive regime'

• Legislation now enacted

• Companies only by election from 1 April 2013

• 10% effective tax rate from 2017 – phased in from 2013

• Applies to income from patents and patented products registered with UK and European Patent Offices, and specified EEA states

Patent ownership conditions

• 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 including it.

• The company in the group holding the patent must actively manage its portfolio of qualifying patents if the patent is not self-developed.

Profit calculation

• Profits can be apportioned to patents by pro-rating to qualifying turnover or by “streaming”

• Qualifying turnover includes worldwide royalties and sale of patents, sale of inventions protected by the patent, and infringement income/damages

• Routine return is 10% on, mostly, staff (non-R&D) costs

• Marketing return can be formulaic in smaller cases

• Profits arising before the patent grant can be included but only at the time the patent is granted

What you should be doing now to maximise the potential benefit

• Consider your existing IP portfolio and future IP strategy:– What are the patents behind your income stream?– Are they qualifying or non qualifying?– Are your patents granted or pending?– Do you own the patent or have an exclusive licence?– Do you have qualifying patents that could be licensed to create

new revenue streams?– Are you inventing solutions to internal manufacturing and

production problems?– If you don’t currently have any patents should you be looking

more closely at your products or processes to see whether patenting may be possible in the future?

These notes have been produced for the guidance of delegates at the conference for which they were prepared and are not a substitute for detailed professional advice.

No responsibility can be accepted for the consequences of any action taken or refrained from as a result of these

notes or the talk for which they were prepared.

Smith & Williamson LLPRegulated by the Institute of Chartered Accountants in England and Wales

for a range of investment business activitiesA member of Nexia International

The word partner is used to refer to a member of Smith & Williamson LLP

Portwall Place, Portwall Lane

Bristol BS1 6NA

Tel: 0117 376 2000 Fax: 0117 376 2001

www.smith.williamson.co.uk

Tax Credits & Patent Box

Dave MounceyPartnerSmith & Williamson LLP