Your guide to the Patent Box and Above The Line R&D tax credit
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Your guide to the Patent Box and Above The Line R&D tax credit

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Your guide to the Patent Box and Above The Line R&D tax credit Your guide to the Patent Box and Above The Line R&D tax credit Document Transcript

  • New tax incentives driving UK innovation Your guide to the Patent Box and Above The Line R&D tax credit From 1 April 2013 two new tax reliefs for innovative companies come into effect. This high level guide sets out some of the opportunities and frequently asked questions to help identify how these might benefit your company.
  • Fast-facts Patent Box Research & Development (R&D) above the line tax credit What is it? 10% effective tax rate on profits derived from patents including the sale of products incorporating a patented component, and some services based on patented technology A cash credit from HM Revenue & Customs (HMRC) equal to 9.1% of a company’s expenditure on qualifying R&D activities What are the key opportunities? •  ny tax paying companies/groups with A qualifying patent rights can reduce their UK tax liabilities •  oss making large companies can benefit from L cash credits for the first time • Loss making companies should consider positioning themselves to take advantage of the relief when they become profitable •  mall and medium-sized enterprises (SMEs) S receiving grant funding or with subsidised R&D expenditure can also claim 9.1% cash credits • All companies should consider whether they can patent items which they produce or use Who does it apply to? Any UK companies/groups who could protect their intellectual property (IP) with patents. ‘Large’ loss making UK companies undertaking R&D and SME companies with subsidised and/or subcontracted R&D Is it optional? Yes. You need to ‘elect in’ to the patent box regime. The company must elect into the Patent Box regime by giving notice to HMRC that it is a qualifying company with a qualifying patent, exclusive licence or patent pending and from which accounting period the company would like to be within the regime. The company must notify HMRC on or before the first anniversary of the corporation tax self assessment (CTSA) filing deadline for that accounting period. The company is then in the Patent Box regime for future periods. Yes. Until 1 April 2016, claims can either be made under the existing R&D tax relief scheme or the new R&D tax credit scheme (but not both). Who should I contact for more details? Samantha Vanags Partner - Head of R&D T 01865 799805 E samantha.j.vanags@uk.gt.com
  • FAQs… Patent Box Who can qualify? To qualify for the Patent Box regime, a company must own a qualifying patent or an exclusive licence under a qualifying patent. The company must also have been involved in the development of the patented invention. Broadly, if the company meets these criteria, then it can elect into the regime. What are the benefits? The adjusted profits arising on the income from patents are partially excluded from UK corporation tax, such that they are taxed at a reduced effective rate. This reduced rate will be 10% from 1 April 2017. The benefit is being phased in from 1 April 2013 such that approximately 33.9% of the adjusted profit is exempt from UK corporation tax and then increases in stages to approximately 52.4% from 1 April 2017. What is a qualifying patent? A patent is a qualifying patent if it is a current patent, irrespective of when granted, and the current patent was granted by one of the following: • UK Intellectual Property Office; • the European Patent Office; or • the patent office of Austria, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Poland, Portugal, Romania, Slovakia or Sweden. The rules also extend to other forms of intellectual property such as supplementary protection certificates and certain plant variety rights. What is an exclusive licence under a patent? An exclusive licence needs to give the licensee an exclusive right to exploit the patent in one or more countries and the right to enforce the patent against any infringement of those rights. If the patent is held by a group company and the patent rights are conferred on another company in the group, then that other company is to be treated as holding an exclusive licence. “We welcome HMRC’s recent clarification on the practicalities of the detailed patent box calculations. In particular, the commercial view taken in respect of the marketing return appears fairer than the legislation originally implied, with restrictions seemingly focussed on the largest consumer brands.” Wendy Nicholls, Head of Transfer Pricing Calculation of patent box profits Step 1: Split profits between qualifying for patent box and non-qualifying The regime applies to the profits arising from the sale of products containing the patented invention, licence and royalty fees from the patent, proceeds of sale of the patent and damages for infringement of the patent or other compensation. The income includes all worldwide income generated from these sources for the UK company. In other words all worldwide income relating to the patent and the patented invention received by the company. In addition, where a patented process is used in the manufacture of product for sale then a ‘notional royalty’ can be charged for the use of the patented process and this will be treated as income from a patent. The ratio of qualifying income to total income is used to split taxable profits (after certain adjustments) as step 1. Step 2: Deduct a routine return The profit relating to income from qualifying patents or exclusive licences is then adjusted to allow for a ‘normal’ return on certain overheads. Step 3: Deduct a brand or marketing return The aim of this adjustment is to remove the element of profit that does not relate to the intellectual property in the patent, such as brand value or normal commercial margin on operations. Do the rules apply to patent pending profits? If you have applied for a qualifying patent but it has not been granted yet then the benefit of this Patent Box regime can apply. The benefit accrues while the patent is pending, and is applied after the grant of the patent. The accrued benefits are restricted to the patent profits arising in the six years up to the date of grant of the patent (and arising after 1 April 2013). What happens with losses? If a company makes losses then it may not be beneficial to elect into the Patent Box regime, although in some cases this may allow the company to access enhanced losses to offset against future profits. Where a ‘patent loss’ arises (ie the company makes a loss from its patent income), it can be offset against other patent profits. If the company is a member of a group and another group company has patent profits, any remaining patent loss must be offset against group patent profits. If the patent loss exceeds the patent profits (including group patent profits), then the excess is carried forward and offset against future patent profits.
  • FAQs… R&D schemes of relief Does this replace the existing R&D schemes of relief? likely that the interpretation of the relevant accounting standards will develop over time. No. This is an alternative treatment for claims made under the large company R&D tax relief scheme. The original scheme will continue to be available until 1 April 2016. Therefore, companies will need to determine whether the new tax credit scheme, or the existing ‘superdeductions’ regime is more beneficial for them. What is R&D for tax purposes? The definition of R&D for tax purposes is set out in guidelines issued by the Department of Business, Innovation, and Skills. Broadly, there are two key criteria to make an R&D claim, a project must: • seek to make a scientific or technological advancement, and “Companies will be able to claim additional R&D tax credits for costs incurred from 1 April 2013, regardless of their accounting period. This is a welcome change to the previous consultation document.” Samantha Vanags, Head of R&D and Patent Box What does this mean for SMEs? From 1 April 2013, where an SME undertakes subcontracted R&D, or subsidised R&D work (eg where a grant is received), they can choose to claim a R&D tax credit in respect of this expenditure. This gives a new opportunity for loss making SME companies to increase their overall R&D tax credit claims. Claims under the current SME scheme, whereby either superdeductions of 225%, and/or tax credits of 24.75% are claimed are completely unaffected by the new legislation. When will the cash be paid out? R&D tax relief claims are normally made as part of a company’s self-assessment tax return. Therefore, a company will need signed accounts, and a completed tax computation and return before the claims can be made. HMRC aim to process SME R&D tax credit claims within 28 days, and we therefore have a similar expectation in respect of this new scheme. What about capitalised R&D costs? Companies with R&D costs which are capitalised as intangible fixed assets in their accounts, but which can be considered to be revenue for tax purposes, are able to make a claim for R&D tax relief in the year of the expenditure. It will be important for loss making companies wanting to claim this cash credit to review their R&D expenditure as it is incurred, rather than as it is amortised. How will the new tax credit be reflected in the financial statements? It is the Government’s intention that the tax credit receivable will be reflected ‘above the line’ in the company’s profit before tax. There is no specific accounting guidance on this in either international or UK accounting standards, and therefore it is • seek to resolve scientific or technological uncertainty. How much cash will be received if a credit is claimed under the new scheme? There is a step process to calculate the actual amount of the cash credit. This is summarised below: 1 The gross tax credit is worth 9.1%. For example, for every £100,000 spent on R&D the maximum gross cash credit is £9,100. 2 The credit must first be used to offset any corporation tax liability in the current period. 3 If a balance remains after this offset, the remainder will be capped by the amount of PAYE/NIC paid in respect of qualifying R&D staff costs included in the R&D claim. Any amount in excess of the cap must be carried forward to be treated as a credit for the following year. 4 Any credit remaining after applying the cap must offset outstanding amounts of corporation tax for other accounting periods. 5 If a balance remains after this offset, and the company is a member of a group, it may surrender all or part of the balance to a group company. 6 After utilising the credit against corporation tax liabilities, the credit is taxable but is received net, so an amount of tax is ‘withheld’ to offset against future corporation tax liabilities. Therefore, the net cash receipt for loss making companies is likely to be capped at 7.007% in financial year 2013. In the above example, this would equate to £7,007. 7 This credit must be offset against any other liabilities the company has to other taxes (PAYE, VAT, etc.). 8 Once these tax liabilities have been discharged, a cash payment is issued to the company. Clearly, each of these steps is important in determining the actual cash benefit of R&D claims, and there are some further points to bear in mind for groups. © 2013 Grant Thornton UK LLP. All rights reserved. ‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to ‘Grant Thornton’ are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication. grant-thornton.co.uk V22494