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

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Presentation on theme: "Ian Taylor Wakefield Enterprise Partnership. Research and Development (R&D) Tax Relief Phil Louch (A very brief overview!)"— Presentation transcript:

1 Ian Taylor Wakefield Enterprise Partnership

2 Research and Development (R&D) Tax Relief Phil Louch (A very brief overview!)

3 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

4 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.

5 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

6 What is an advance? Must represent an advance in the overall knowledge or capability in a field of science or technology not a companys own state of knowledge or capability alone Can be an appreciable improvement to an existing process, product etc

7 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.

8 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

9 Where to get help HMRC website - BIS website Specialist units See page of the CIRD ( Corporate Intangible Research and Development) Manual located on the HMRC Website. R&D Webinar - See R&D page of HMRC website

10 The Patent Box Phil Louch Wakefield 18 March 2013

11 Project Name: HMRC v1.8 | 03/01/2014 | 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 UKs Controlled Foreign Company regime Foreign branch exemption Reforms to the taxation of intellectual property (IP) including R&D tax credits

12 Project Name: HMRC v1.8 | 03/01/2014 | 12 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 UKs position as a world leader in patented technologies.

13 Project Name: HMRC v1.8 | 03/01/2014 | 13 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: Full guidance in CIRD manual: CIRD Further help: see last slide

14 Project Name: HMRC v1.8 | 03/01/2014 | 14 The Patent Box – overview 10% corporation tax rate on profits attributed to patents; phasing in from April 2013

15 Project Name: HMRC v1.8 | 03/01/2014 | 15 The Patent Box – overview 10% corporation tax rate on profits attributed to patents; phasing in from April 2013 UK, EPO & certain other patents

16 Project Name: HMRC v1.8 | 03/01/2014 | 16 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

17 Project Name: HMRC v1.8 | 03/01/2014 | 17 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

18 Project Name: HMRC v1.8 | 03/01/2014 | 18 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

19 Project Name: HMRC v1.8 | 03/01/2014 | 19 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 patents 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.

20 Project Name: HMRC v1.8 | 03/01/2014 | 20 22% tax Unpatented products Routine return Marketing return Qualifying 22% tax 10% tax The Patent Box – calculating the profit Corporation Tax Profits Before Interest etc.

21 Project Name: HMRC v1.8 | 03/01/2014 | 21 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).

22 Project Name: HMRC v1.8 | 03/01/2014 | 22 The Patent Box – first stage - total gross income Includes: Companys 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.

23 Project Name: HMRC v1.8 | 03/01/2014 | 23 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

24 Project Name: HMRC v1.8 | 03/01/2014 | 24 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.

25 Project Name: HMRC v1.8 | 03/01/2014 | 25 The Patent Box – example 1. Total gross income£60m

26 Project Name: HMRC v1.8 | 03/01/2014 | 26 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%

27 Project Name: HMRC v1.8 | 03/01/2014 | 27 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

28 Project Name: HMRC v1.8 | 03/01/2014 | 28 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

29 Project Name: HMRC v1.8 | 03/01/2014 | 29 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

30 Project Name: HMRC v1.8 | 03/01/2014 | 30 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 – 22% = £1.32m

31 Project Name: HMRC v1.8 | 03/01/2014 | 31 The Patent Box – phasing in of benefits Tax year2013/142014/152015/162016/172017/18 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

32 Project Name: HMRC v1.8 | 03/01/2014 | 32 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 companys disadvantage.

33 Project Name: HMRC v1.8 | 03/01/2014 | 33 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 Box100

34 Project Name: HMRC v1.8 | 03/01/2014 | 34 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 Box100 Less: routine profit(10)

35 Project Name: HMRC v1.8 | 03/01/2014 | 35 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 Box100 Less: routine profit(10) Add: loan relationship debits100

36 Project Name: HMRC v1.8 | 03/01/2014 | 36 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 Box100 Less: routine profit(10) Add: loan relationship debits100 Adjusted Profits190

37 Project Name: HMRC v1.8 | 03/01/2014 | 37 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 Box100 Less: routine profit(10) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP) (500:500 50%)95

38 Project Name: HMRC v1.8 | 03/01/2014 | 38 The Patent Box – streaming example Formulaic £ Streaming £ 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 Box100 Less: routine profit(10) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP)95

39 Project Name: HMRC v1.8 | 03/01/2014 | 39 The Patent Box – streaming example Formulaic £ Streaming £ Sales (500~IP, 500 Non-IP) Cost of raw materials(700)(100) Loan relationship debits(100) Staff costs (all needs marking up)(100)(70) Taxable profit without Patent Box100 Less: routine profit(10) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP)95

40 Project Name: HMRC v1.8 | 03/01/2014 | 40 The Patent Box – streaming example Formulaic £ Streaming £ Sales (500~IP, 500 Non-IP) Cost of raw materials(700)(100) Loan relationship debits(100) Staff costs (all needs marking up)(100)(70) Taxable profit without Patent Box100 Patent Box profit before adjustment330 Less: routine profit(10) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP)95

41 Project Name: HMRC v1.8 | 03/01/2014 | 41 The Patent Box – streaming example Formulaic £ Streaming £ Sales (500~IP, 500 Non-IP) Cost of raw materials(700)(100) Loan relationship debits(100) Staff costs (all needs marking up)(100)(70) Taxable profit without Patent Box100 Patent Box profit before adjustment330 Less: routine profit(10)(7) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP)95

42 Project Name: HMRC v1.8 | 03/01/2014 | 42 The Patent Box – streaming example Formulaic £ Streaming £ Sales (500~IP, 500 Non-IP) Cost of raw materials(700)(100) Loan relationship debits(100) Staff costs (all needs marking up)(100)(70) Taxable profit without Patent Box100 Patent Box profit before adjustment330 Less: routine profit(10)(7) Add: loan relationship debits100 Adjusted Profits190 Relevant IP profit (RP)95323

43 Project Name: HMRC v1.8 | 03/01/2014 | 43 The Patent Box – streaming example continued FormulaicStreaming Relevant IP profit £95£323 Patent Box deductionRP 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.

44 Project Name: HMRC v1.8 | 03/01/2014 | 44 The Patent Box – other features R&D shortfall.

45 Project Name: HMRC v1.8 | 03/01/2014 | 45 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 companys patent portfolio starts to produce income.

46 Project Name: HMRC v1.8 | 03/01/2014 | 46 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 companys patent portfolio starts to produce income. Pre-grant profits

47 Project Name: HMRC v1.8 | 03/01/2014 | 47 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 companys 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.

48 Project Name: HMRC v1.8 | 03/01/2014 | 48 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 companys 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

49 Project Name: HMRC v1.8 | 03/01/2014 | 49 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 companys 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 companys 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

50 Project Name: HMRC v1.8 | 03/01/2014 | 50 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 companys 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 companys 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

51 Project Name: HMRC v1.8 | 03/01/2014 | 51 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 companys 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 companys 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. PartnershipsCorporate partners can separately elect.

52 Project Name: HMRC v1.8 | 03/01/2014 | 52 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:


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