1. Wakefield Enterprise Partnership
Ian Taylor
Wakefield Enterprise Partnership

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

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 = 125%
Enhancement is then deducted in the Corporation Tax computation
Small and medium sized enterprises are, broadly, enterprises with a headcount of under 500 and either a turnover of under €100m or balance sheet of under €86m. I haven’t written the sterling equivalent in case that figure becomes out of date!
By having an extra deduction in the CT computation a company’s profit for CT purposes is reduced, reducing the amount of CT which it has to pay. If that deduction creates or increase a loss most company’s may choose to receive a payment- R&D Tax Credit- which will be paid by HMRC.

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 = 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.
Broadly speaking the rates mean that where a tax relief and tax credit claim are made for every £100 spent a payment of about £25 is received back as cash.

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 company’s own state of knowledge or capability alone
Can be an appreciable improvement to an existing process, product etc
Overall knowledge or capability – not readily deducible by a competent professional working in the field
Appreciable improvement – improve the scientific or technological characteristics of something to the point where a competent professional would regard the improvements as a genuine and non-trivial improvement
Abortive projects
Not all projects succeed in their aims.
What counts is whether there is an intention to achieve an advance in science or technology, not whether ultimately the associated scientific or technological uncertainty is completely resolved, or resolved to the degree intended.
Projects where the advance has been made but details not readily available.

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.
Staffing costs - Must be employees of the company, subject to PAYE.
Consumables - items that are used by the R&D and are no longer useable in their original form, because they are finished up,
or transformed.
Subcontract costs – Subcontracted where there is a contract for R&D activities
to be carried out by one for the other. Subcontracted R&D must be directly
undertaken on behalf of the company and be relevant R&D.
EPW:
Individual who is not a director or employee of claimant company, personally provides services to company.
Services must be subject to supervision or control by company and
must be provided through a service provider with whom the worker (will normally) have a contract of employment
tripartite condition removed for expenditure incurred on or after 1 April 2012
Distinguish between EPWs, subcontractors and consultants
EPW expenditure – unconnected EPW, expenditure restricted to 65%
- connected EPW, lower of 100% and their relevant expenditure

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
Expenditure – apportion between non-qualifying and qualifying
Time limits – 2 years from end of AP. Not covered by overpayment relief.
Boxes 87 (tax credit), 101 and 102 (enhanced amount)

9. Where to get help HMRC website - www.hmrc.gov.uk 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. Event Name Here Phil Louch Wakefield 18 March 2013
12/02/2007
The Patent Box
Phil Louch
Wakefield 18 March 2013
Project Name: HMRC v1.8

11. The Patent Box - context
Event Name Here
12/02/2007
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
Project Name: HMRC v1.8

12. Patent Box - aims And To encourage investment in the UK by:
Event Name Here
12/02/2007
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.
Project Name: HMRC v1.8

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. The Patent Box – overview
Event Name Here
12/02/2007
The Patent Box – overview
10% corporation tax rate on profits attributed to patents; phasing in from April 2013
Project Name: HMRC v1.8

15. The Patent Box – overview
Event Name Here
12/02/2007
The Patent Box – overview
10% corporation tax rate on profits attributed to patents; phasing in from April 2013
UK, EPO & certain other patents
Project Name: HMRC v1.8

16. The Patent Box – overview
Event Name Here
12/02/2007
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
Project Name: HMRC v1.8

17. The Patent Box – overview
Event Name Here
12/02/2007
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
Project Name: HMRC v1.8

18. The Patent Box – overview
Event Name Here
12/02/2007
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
Project Name: HMRC v1.8

19. The Patent Box – ownership requirements
Event Name Here
12/02/2007
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.
Project Name: HMRC v1.8

20. Corporation Tax Profits Before Interest etc.
Event Name Here
12/02/2007
The Patent Box – calculating the profit
Corporation Tax Profits Before Interest etc.
< Unpatented products
< Routine return
< Marketing return
< Qualifying
22% tax
22% tax
10% tax
22% tax
22% tax
Project Name: HMRC v1.8 20

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. 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.

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. 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. The Patent Box – example
1. Total gross income
£60m

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. 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. 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. 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. 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. The Patent Box – phasing in of benefits
10% corporation tax rate will be phased in over first five years:
Tax year
2013/14
2014/15
2015/16
2016/17
2017/18
Proportion of full benefit available
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

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 company’s disadvantage.

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)
Taxable profit without Patent Box
100

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)
Taxable profit without Patent Box
100
Less: routine profit
(10)

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)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits

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)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
Adjusted Profits
190

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)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) (500:500 50%) 95

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 Box
100
Less: routine profit
(10)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) 95

39. The Patent Box – streaming example
Formulaic
Streaming
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
Staff costs (all needs marking up)
(70)
Taxable profit without Patent Box
100
Less: routine profit
(10)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) 95

40. The Patent Box – streaming example
Formulaic
Streaming
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
Staff costs (all needs marking up)
(70)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) 95

41. The Patent Box – streaming example
Formulaic
Streaming
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
Staff costs (all needs marking up)
(70)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
(7)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) 95

42. The Patent Box – streaming example
Formulaic
Streaming
Sales (500~IP, 500 Non-IP)
1000
500
Cost of raw materials
(700)
(100)
Loan relationship debits
Staff costs (all needs marking up)
(70)
Taxable profit without Patent Box
100
Patent Box profit before adjustment
330
Less: routine profit
(10)
(7)
Add: loan relationship debits
Adjusted Profits
190
Relevant IP profit (‘RP’) 95
323

43. The Patent Box – streaming example continued
Formulaic Streaming
Relevant 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.

44. The Patent Box – other features
R&D shortfall .

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 company’s patent portfolio starts to produce income.

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 company’s patent portfolio starts to produce income.
Pre-grant profits

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 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.

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 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

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 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

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 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

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 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.

52. Further help Medvale House Mote Road Maidstone Kent ME15 6AF
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: