Ian Taylor Wakefield Enterprise Partnership. Research and Development (R&D) Tax Relief Phil Louch (A very brief overview!)

Ian TaylorWakefield 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 unitsSee 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 LouchWakefield 18 March 2013

Project Name: HMRC v1.8 | 10/04/23 | 11

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

http://www.hmrc.gov.uk/patentbox


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






Applies to profits before interest costs

After deducting a routine return on certain costs and a marketing profit if applicable


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.


22% tax Unpatented products

Routine return

Marketing return

Qualifying

22% tax

22% tax

22% tax

10% tax

The Patent Box – calculating the profit

Corporation Tax Profits Before Interest etc.


The Patent Box – calculating the ‘relevant IP profit’

Normal apportionment rules

First stage1. 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 stage4. Deduct the routine return figure to get the qualifying residual profit (QRP).

Third stage5. Calculate the small claims amount, or6. 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 – 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 = £11mFurther adjustments = add £2m80% x £13m = £10.4m








4. Deduct the routine return figure giving you the qualifying residual profit.

Routine return = (£15m x 10%) x 80% = £1.2mQRP = £10.4m - £1.2m = £9.2m








4. Deduct the routine return figure giving you the qualifying residual profit.

Routine return = (£15m x 10%) x 80% = £1.2mQRP = £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 = £nilRelevant IP profit = £9.2m


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

Tax year 2013/14 2014/15 2015/16 2016/17 2017/18

Proportion of full benefit available

60% 70% 80% 90% 100%

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

£

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



Formulaic £

Sales (500~IP, 500 Non-IP) 1000





Less: routine profit (10)



Formulaic £

Sales (500~IP, 500 Non-IP) 1000






Add: loan relationship debits 100



Formulaic £

Sales (500~IP, 500 Non-IP) 1000







Adjusted Profits 190



Formulaic £

Sales (500~IP, 500 Non-IP) 1000








Relevant IP profit (‘RP’) (500:500 50%) 95



Formulaic £

Streaming £

Sales (500~IP, 500 Non-IP) 1000








Relevant IP profit (‘RP’) 95



Formulaic £

Streaming £

Sales (500~IP, 500 Non-IP) 1000 500

Cost of raw materials (700) (100)


Staff costs (all needs marking up) (100) (70)








Formulaic £

Streaming £

Sales (500~IP, 500 Non-IP) 1000 500





Patent Box profit before adjustment 330







Formulaic £

Streaming £

Sales (500~IP, 500 Non-IP) 1000 500






Less: routine profit (10) (7)






Formulaic £

Streaming £

Sales (500~IP, 500 Non-IP) 1000 500






Less: routine profit (10) (7)



Relevant IP profit (‘RP’) 95 323


The Patent Box – streaming example continued

Formulaic StreamingRelevant 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.


The Patent Box – other features

R&D shortfall .



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




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





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





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





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.


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 UnitMedvale HouseMote RoadMaidstoneKentME15 6AF

Tel: 01622 760 405

Ian Taylor Wakefield Enterprise Partnership. Research and Development (R&D) Tax Relief Phil Louch (A very brief overview!)

Documents

slide slide

patents profits

corporation tax rate

patent box overview

hmrc v1

applicable slide

patents development

rd project