Research and Development Tax Credit and Patent Box

1

Welcome

2

Programme

Mary Tierney & Graham Odlin

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

4

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?

5

2. Identify the Project


Start

• Identify uncertainties

• Capture information

Finish

• Permanent or temporary

• New project

Restrictions

• Subsidies• Grants

6

3. Capture all appropriate costs : 1 salary costs


Pensions and NIC• Salary

Travel costs• Company

to pay, not individual

Don’t include

Overheads

7

4. Capture all appropriate costs 2 : consumables


Prototypes

First of class

Materials or subcontract

Subsidies or grant

8

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


9

• 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


10

Being activities which form part of a project but do not directly contribute to the resolution of the scientific or technological uncertainty


11

6. Subcontracting


Large or overseas customer

SME

Subcontracts part of its R&D project

Claim R&D (large

scheme)

What is subcontracting?

12

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


13

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


14

7. Watch out for state aided grants, for example:


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£

15

8. What is a subsidy?

• Small companies can claim under large scheme too – Above the Line Tax Credit


16

9. Don’t forget internal use software?


17

10. R&D Allowances


18

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

19

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’


20

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 worthwhile6. Otherwise, remove the marketing assets return (notional royalty on marketing assets

used to derive RIPI) in order to establish Relevant IP Profits7. Adjust taxable profit to give the correct effective tax rate on Relevant IP Profits


21

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

22

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


23

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)


24

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


25

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


26

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


27

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


28

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


29

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.


30

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.


31

Questions

32

Contacts

[email protected] 831 1159

mailto:[email protected]

mailto:[email protected]

01

33

18 offices in the UK including Manchester, London, Liverpool, Leeds, Birmingham, Bristol, Edinburgh and Glasgow.

We work with a wide range of clients – from individuals to local businesses to large corporate companies and global organisations – and across many sectors.

Mazars is not only ranked as the ninth largest UK partnership by audit fee income, but we are also one of Europe’s largest accounting firms and have a huge global presence with 13,500 staff across 71 countries (including an office in Rio).

Mazars Worldwide

Research and Development Tax Credit and Patent Box

Business

Transcript of Research and Development Tax Credit and Patent Box