This document provides tips for claiming R&D tax relief in the UK. It discusses identifying qualifying R&D projects and costs, capturing salary and other eligible expenses, subcontracting R&D work, and planning remuneration. It also outlines how the UK patent box regime works, including establishing relevant IP income, actively managing intellectual property, and making the necessary election. Key recommendations include thinking widely about qualifying profits and expenses, maintaining R&D spending, ensuring a fair allocation of costs, and making the election if wanting to benefit from the lower tax rate on patent income.

1. 1
Welcome

2. 2
Programme

3. 3
R&D – The Benefits
Without
R&D With R&D
£ £
Taxable profit 250,000 250,000
R&D enhanced relief 62,500-
Revised taxable profit 250,000£ 187,500£
Corporation tax at 20% 50,000£ 37,500£
R&D spend
£50,000
Saving
£12,500
Or £5,500
cash back
if loss
making

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1. Talk to the right person/people:
– The production manager
– The head of development
– The software developers
– The factory manager
– ……
– The finance director -----------------------------HOW MUCH?
R&D – Top Ten Tips
WHAT?

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2. Identify the Project
R&D – Top Ten Tips
Start
• Identify
uncertainties
• Capture
information
Finish
• Permanent
or temporary
• New project
Restrictions
• Subsidies
• Grants

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3. Capture all appropriate costs : 1 salary costs
R&D – Top Ten Tips
Pensions
and NIC
• Salary
Travel
costs
• Company
to pay, not
individual
Don’t
include
Overheads

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4. Capture all appropriate costs 2 : consumables
R&D – Top Ten Tips
Prototypes
First of
class
Materials or
subcontract
Subsidies
or grant

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5. Capture all appropriate costs 3 : Staffing costs in respect of qualifying indirect activities,
being:
• scientific and technical information services supporting R&D
– such as the preparation of the original report of R&D findings;
• indirect supporting activities as long as undertaken for R&D purposes
– maintenance,
– security,
– administration and clerical activities, and
– finance and personnel activities
R&D – Top Ten Tips

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• ancillary activities essential to the undertaking of R&D;
– taking on and paying staff, leasing laboratories and maintaining research and
development equipment including computers used for R&D purposes;
• training required to directly support an R&D project;
• research by students and researchers carried out at universities;
• research to devise new scientific or technological testing, survey, or sampling methods,
where this research is not R&D in its own right; and
• feasibility studies to inform the strategic direction of a specific R&D activity
R&D – Top Ten Tips

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Being activities which form part of a project but do not directly contribute to the resolution of
the scientific or technological uncertainty
R&D – Top Ten Tips

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6. Subcontracting
R&D – Top Ten Tips
Large or overseas
customer
SME
Subcontracts
part of its
R&D project
Claim R&D
(large
scheme)
What is subcontracting?

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6. R&D and remuneration planning
For example, a company with:
• Taxable Profit of £1,000,000, paying
• Salary of £100k
Would save approximately £18k by paying a director shareholder
• a dividend of £73k
• Giving the same net personal income
However
R&D – Top Ten Tips

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6. If the salary of £100k is qualifying R&D expenditure
It would cost the same company with:
• Taxable Profit of £1,000,000, paying
• Salary of £100k
Approximately £10k by paying a director shareholder
• a dividend of £73k
• Rather than a salary of £100k even though the individual receives the same net personal
income
R&D – Top Ten Tips

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7. Watch out for state aided grants, for example:
R&D – Top Ten Tips
Grant 25,000£
R&D spend 125,000£
No Grant Grant
£ £
Income 400,000 400,000
Costs 200,000- 175,000-
R&D relief 156,250- -
Taxable profit 43,750 225,000
Tax 8,750 45,000
Increase in wealth 191,250£ 180,000£

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8. What is a subsidy?
• Small companies can claim under large scheme too – Above the Line Tax Credit
R&D – Top Ten Tips

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9. Don’t forget internal use software?
R&D – Top Ten Tips

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10. R&D Allowances
R&D – Top Ten Tips

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Need to hold a Qualifying IP Right (or an exclusive licence over such a right) and satisfy
• the ‘qualifying development’ condition; and
• the active ownership condition (if a member of a group)
Qualifying IP Right includes
• Patents granted by UK IPO
• Patents granted by EPO
• Patents issued by certain EEA authorities
• Other specific rights eg supplementary protection certificates, plant variety rights
Patent Box – How it works

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10% tax rate (eventually) on profits from Relevant IP Profits
Relevant IP Profits include
• Profits on sale of patented items/items incorporating patented items/items to be
incorporated into patented items
• Licence fees/royalties
• Proceeds on sale of qualifying IP/infringement income, damages etc
• Notional royalty on patented processes used to derive other profits
but exclude ‘routine returns’ and returns on ‘other marketing assets’
Patent Box – How it works

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1. Establish the percentage of total gross income of the trade that constitutes relevant IP
income (RIPI).
2. Apply this percentage to taxable profit (as adjusted for certain items) to find that
element attributable to IP
3. Remove the routine return (calculated as a 10% mark up on certain costs)
4. The balance is the Qualifying Residual Profit (QRP)
5. Consider whether small claims treatment is available (always if QRP < £1m, possibly if
QRP £1m - £3m) and worthwhile
6. Otherwise, remove the marketing assets return (notional royalty on marketing assets
used to derive RIPI) in order to establish Relevant IP Profits
7. Adjust taxable profit to give the correct effective tax rate on Relevant IP Profits
Patent Box – How it works

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1. Review whether you have or should have qualifying patents
• granted by relevant body
• also includes exclusive licences – review terms of existing licences
• includes patents used in processes
X
Patent Box – Top Ten Tips

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2. Document the development work undertaken and by whom
• create, or significantly contribute to the creation of, the patented
invention;
• perform significant activity to develop the patented invention, or any
product or process incorporating it
• more than simply commercialisation of fully developed product
• can be undertaken by group company
Patent Box – Top Ten Tips

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3. If a group company carried out the development activity, you will need to demonstrate
for each accounting period that the patent box company actively manages the IP
• the patent box company is involved in the planning and decision making
activities associated with developing or exploiting its qualifying IP;
• includes activities such as deciding on whether to maintain protection in
particular jurisdictions, deciding whether to grant licences, researching
alternative applications (or licensing others to do so), decisions re
products into which the patented item should be incorporated;
• management activity must be significant (but not necessarily to the
exclusion of others eg where normal group governance requires
reference to parent company Board)
Patent Box – Top Ten Tips

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4. Think widely in determining RIPI
• profits from the sale of a whole product are included as long as a patented
item is incorporated into the product
• licensing other IP together with patent will qualify if for the same purpose
• notional royalty for patented processes
Patent Box – Top Ten Tips

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5. Plan R&D expenditure
• calculate average annualised spend in the 4 years pre entry into the regime;
• if spend in any of the first 4 years post entry is <75% of that, reduce profits to
which patent box may apply;
• maintaining R&D spend in first 4 years avoids this issue;
• NB retain full benefit of R&D uplift for that year’s spend
Patent Box – Top Ten Tips

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6. Bear only your fair share of routine costs
• routine return (10% mark up on routine costs) is excluded from patent box
profits;
• review group recharge policy to ensure patent box company’s share is not
excessive;
• NB beware transfer pricing provisions
Patent Box – Top Ten Tips

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7. Assess whether small claims treatment is available and worthwhile
• if QRP < £1m – Relevant IP Profits (RP) = 75% of QRP;
• if QRP £1m - £3m, RP = lower of 75% of QRP or £1m – but only if no
deduction has been made for marketing royalty (at step 6) in any of the
previous 4 years;
• worthwhile only if significant other IP such as brands
Patent Box – Top Ten Tips

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8. Value notional marketing royalty – pragmatic approach
• the amount the company would, in theory, pay to exploit its marketing assets
(brand names, trade marks, trade dress etc);
• excluded from QRP to calculate RP (assuming smalls claim treatment not
elected for);
• ignore if < 10% of QRP;
• pragmatic and common-sense approach
Patent Box – Top Ten Tips

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9. Consider whether streaming gives a better result
• may elect to ignore apportionment of profits but use actual income and
expenses instead;
• will require just and reasonable allocation of expenses between different
income streams;
• beneficial if IP income of high profitability compared to other income.
Patent Box – Top Ten Tips

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10. Make the election if you want to be in the regime
• in writing, within 12 months of the filing date for the return for the first period
to which it is to apply;
• may be made within the computation;
• patents pending – benefits for up to 6 years given in the year the patent is
granted – as long as election made for the earlier years;
• don’t elect in early loss-making years;
• may revoke election for subsequent periods (same time limit);
• but must then wait 5 years before you can re-enter.
Patent Box – Top Ten Tips

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Questions

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Contacts
mary.tierney@mazars.co.uk
0161 831 1159

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