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RESEARCH & DEVELOPMENT TAX CREDITS& UK PATENT BOX REGIMESummary of the new regimesVince Walker29 April 2013Copyright © May...
RESEARCH AND DEVELOPMENT TAX CREDITS
RESEARCH AND DEVELOPMENTBENEFITS• Monetary benefitsSmall companies- For every £100 of qualifying expenditure, the company ...
RESEARCH AND DEVELOPMENTPer DTI Guidelines• The Project must be seeking to obtain an advance in science or technology.• Ac...
RESEARCH AND DEVELOPMENT• Wages and salary costs• Consumable materials• Utilities• Software• Qualifying indirect overheads...
PATENT BOX
The basics of the new regimePage 7• 10% tax rate on patent profits• Applies to new and existing patents – granted by HMRC ...
PATENT BOX EXAMPLESale of a carPage 8Patentedsteering wheelWhole of profits from sale of car qualify
PATENT BOXPhasing in the 10% rateFinancial Year 2013-14 2014 -152015 -162016 -172017 –18% of reduced tax rate inforce60% 7...
The basics of the new regimePage 10Conditions and computation• Must be a „qualifying company‟• Computation of income in th...
What is a Qualifying Company?• Must hold relevant IP• Qualifying IP rights, or• Exclusive licence in respect of qualifying...
Introduction to patentsPage 12IPO definition (paraphrase s1 Patent Act 1977)• Invention must be- New, include an inventive...
Introduction to patentsPage 13• Traditionally a form of IP protection granted for up to 20 years- Maximise the breadth of ...
Determination of patent box profitsThree StagesStage 1: Identify qualifying net incomeStage 2: Extract routine profit elem...
Determination of patent box profitsStage 1Stage 1a: Identify total gross income of the trade of the companyIncludes- Trade...
Determination of patent box profitsStage 1Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total t...
Determination of patent box profitsStage 1Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total t...
Determination of patent box profitsStage 1Stage 1c: Split trading profits according to percentage of RIPI/total gross inco...
Determination of patent box profitsStage 2Stage 2: Remove routine return to determine “Qualifying Residual Profit” (“QRP”)...
Determination of patent box profitsStage 3Stage 3: Remove marketing return to arrive at “Relevant IP Profits”Either• Small...
Page 21Example
BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member ofBDO Inter...
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R & D Credits and the Patent Box

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This presentation by Mr Vince Walker, a tax partner at the Liverpool offices of BDO, was the second presentation to the meeting of Liverpool Inventors Club of 29 April 2013 on the Patent Box. It sets out the patent box concession in the context of other concessions to encourage R & D in the UK. It explains the conditions and provides a worked example.

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Transcript of "R & D Credits and the Patent Box"

  1. 1. RESEARCH & DEVELOPMENT TAX CREDITS& UK PATENT BOX REGIMESummary of the new regimesVince Walker29 April 2013Copyright © May 13 BDO LLP. All rights reserved.INVENTORS CLUB
  2. 2. RESEARCH AND DEVELOPMENT TAX CREDITS
  3. 3. RESEARCH AND DEVELOPMENTBENEFITS• Monetary benefitsSmall companies- For every £100 of qualifying expenditure, the company is entitled to an additional £125deduction for tax purposes- At a tax rate of 24% this equates to a benefit of £30 for every £100 of qualifying expenditureLarge companies- For every £100 of qualifying expenditure, the company is entitled to an additional £30deduction for tax purposes- At a tax rate of 24% this equates to a benefit of £7.20 for every £100 of qualifying expenditure• Cash repayment• Tax R&D is different to accounting R&DPage 3
  4. 4. RESEARCH AND DEVELOPMENTPer DTI Guidelines• The Project must be seeking to obtain an advance in science or technology.• Activities that are qualifying R&D are those that directly contribute to theadvance, through the resolution of scientific or technological uncertainty (seeexamples)• Does it qualify – it is considered from the viewpoint of a „competentprofessional in the field‟WHICH PROJECTS QUALIFY?Page 4
  5. 5. RESEARCH AND DEVELOPMENT• Wages and salary costs• Consumable materials• Utilities• Software• Qualifying indirect overheadsTYPICAL QUALIFYING EXPENDITUREPage 5
  6. 6. PATENT BOX
  7. 7. The basics of the new regimePage 7• 10% tax rate on patent profits• Applies to new and existing patents – granted by HMRC approvedpatent offices• From the effective date – accounting periods beginning on or after1 April 2013• Split year treatment for 2013 year ends• Phase in over a five year period (60%, 70%, 80%, 90%, 100%)
  8. 8. PATENT BOX EXAMPLESale of a carPage 8Patentedsteering wheelWhole of profits from sale of car qualify
  9. 9. PATENT BOXPhasing in the 10% rateFinancial Year 2013-14 2014 -152015 -162016 -172017 –18% of reduced tax rate inforce60% 70% 80% 90% 100%Main rate of CT(proposed)23% 21% 20% 20% 20%Small companies rate ofCT20% 20% 20% 20% 20%Effective patent box tax rates:Large companies: 15.2% 13.3% 12% 11% 10%Small companies: 14% 13% 12% 11% 10%Page 9
  10. 10. The basics of the new regimePage 10Conditions and computation• Must be a „qualifying company‟• Computation of income in the box = three stage process
  11. 11. What is a Qualifying Company?• Must hold relevant IP• Qualifying IP rights, or• Exclusive licence in respect of qualifying IP rights• Qualifying IP right• Patent granted by UK or European Patent Office (plus certain other patent offices)• Must meet the “development criteria”Page 11
  12. 12. Introduction to patentsPage 12IPO definition (paraphrase s1 Patent Act 1977)• Invention must be- New, include an inventive step- Be capable of being made or used in some kind of industry• Invention must not be- Scientific or mathematical discovery, theory or method- Literary, dramatic, musical or artistic work- Way of performing a mental act, playing a game or doing business- Presentation of information or some computer programmes- Animal or plant variety- Method of medical treatment or diagnosis- Against public policy or morality
  13. 13. Introduction to patentsPage 13• Traditionally a form of IP protection granted for up to 20 years- Maximise the breadth of the monopoly protection („broad claim‟)- Subject to „opposition‟ and challenge• (i) scepticism about value for smaller companies (ii) not traditional insome industries (iii) concern about public disclosure• Specific industries - software
  14. 14. Determination of patent box profitsThree StagesStage 1: Identify qualifying net incomeStage 2: Extract routine profit element (10% mark up on costs)Stage 3: Extract „brand‟ value to determine patent profitsREMAINING PATENT PROFITS SUBJECT TO TAX AT 10%Page 14
  15. 15. Determination of patent box profitsStage 1Stage 1a: Identify total gross income of the trade of the companyIncludes- Trade income- Credits brought into account for tax on the realisation of intangible assets and pre-2002patent rightsExcludes- Income streams from financial assets and lending activitiesPage 15
  16. 16. Determination of patent box profitsStage 1Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income(from Step 1a)Relevant IP Incomea) Actual income1i) Income from the sale of qualifying items (i.e., an item protected by a qualifyingpatent)1ii) Income from the sale of items incorporating a qualifying patent1iii) Income from the sale of items wholly or mainly designed to be incorporated into aqualifying item (e.g., spare parts)2. Licence fee or royalty fees for granting rights over qualifying IP or rights grantedunder an exclusive licence3. Proceeds from realisation4. Infringement incomePage 16
  17. 17. Determination of patent box profitsStage 1Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income(from Step 1a)b) Deemed income“Notional royalty income”• Company holds a relevant IP right• Total gross income of the company includes any income derived from “things done bythe company that involve the exploitation by the company of that right, and• That income is not itself relevant IP income or excluded incomeCompany can compute a notional royalty that is treated as Relevant IP IncomePage 17
  18. 18. Determination of patent box profitsStage 1Stage 1c: Split trading profits according to percentage of RIPI/total gross incomePrior to any apportionment• Add back any R&D expenses• Strip out any loan relationship debits and creditPage 18
  19. 19. Determination of patent box profitsStage 2Stage 2: Remove routine return to determine “Qualifying Residual Profit” (“QRP”)• 10% mark up on certain costs• Capital allowances• Costs of premises• Personnel costs• Plant and machinery• Professional services• Utilities and transportationPage 19
  20. 20. Determination of patent box profitsStage 3Stage 3: Remove marketing return to arrive at “Relevant IP Profits”Either• Small claims relief• Take 25% of QRP out as a deemed marketing return• Remaining 75% (up to a maximum of £1 million) is left in the patent boxOr• Compute an arms length royalty rate on the marketing assets – “notional marketingroyalty”• Trade marks• Signs and indications or geographical origin of goods or services• Information about actual or potential customersPage 20
  21. 21. Page 21Example
  22. 22. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member ofBDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network ofindependent member firms. A list of members names is open to inspection at our registered office, 55 Baker Street,London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investmentbusiness.BDO is the brand name of the BDO network and for each of the BDO Member Firms.BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within theinternational BDO network of independent member firms.Copyright ©2012 BDO LLP. All rights reserved.www.bdo.co.uk
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