The government is focused on making the UK tax system one of the most competitive regimes in the world and the UK is now ranked fourth in the western world behind Ireland, Canada and Denmark. A key part of its economic strategy is to develop the knowledge based economy and this has led them to focus support and tax reliefs on innovative companies.
Many businesses miss out on valuable opportunities either due to a perception that their activities do not qualify or a concern about the potential cost of undertaking the relevant work and this edition of Tax Connect aims to address these concerns.
What opportunities are available?
Innovative companies can benefit from government assistance in a variety of ways:
- Research and Development Tax Relief
- Reduced corporation tax exposure under the Patent Box regime
- Access to financial grants
- Access to support to facilitate business growth including
- Knowledge Transfer Partnerships and Catapult Centres
This edition of Tax Connect focuses on the first two whilst the latter two will be covered in a future edition.
What is an innovative business?
Whilst a significant number of businesses will be recognisable as such by their owners or by peers in the industry, many more will be undertaking a degree of innovation within an area of their business even if this is not visible to third parties.
These businesses often do not recognise the opportunities available to them and a more pertinent approach is to consider whether the business faces challenges in any area of its operations and whether it comes up with its own solutions to these challenges rather than acquiring an existing solution.
Any businesses fitting this profile should consider themselves as innovative and should be considering tax reliefs.
We are still not sure what might indicate that we are an innovative business?
Businesses that can answer yes to one or more of the following sample questions could be considered as innovative:
- Have you made any advances in sciences or technology?
- Do you provide bespoke products or solutions to customers rather than simply selling a product?
- Do customers approach you to undertake design, manufacture or software development on their behalf due to your expertise?
- Have you developed your own software or developed software processes to improve internal efficiencies (e.g. processing speed, real time delivery, interfacing)?
- Do you use existing technology in a unique way or have you combined existing technologies in a new way?
- Have you attempted to solve challenges using technology? (success or failure is irrelevant)
- Have you subcontracted specific work (e.g. manufacturing, technological or design work) to third parties due to their expertise?
- Have you made technological improvements to existing systems or processes or used technology to differentiate yourselves from competitors?
- Do you employ engineers or technical staff?
- Have you filed any patents or received any grants?
Research & Development Tax Relief or Tax Relief for Resolving Difficulties?
The words “Research and Development” conjure up images of people in laboratories wearing white coats but the relief is much wider and where there is a positive response to one of the questions above the relief should be considered.
We recommend that our clients consider R & D as standing for “Resolving Difficulties” which focuses businesses on identifying and exploiting the valuable opportunities and this has led to us making valuable claims on a significant number of our clients.
In the latest annual published statistics, over 5,700 companies made R & D claims in London and the South East resulting in tax savings of £735m demonstrating that the relief applies widely.
The extracts from the latest National Statistics below give an indication of claims and value by sector:
What is the relief?
The relief enables small or medium sized enterprises to claim a 225% deduction on qualifying expenditure on R&D related activities.
The qualifying expenditure includes:
- Relevant staff costs (including employers NIC);
- Subcontracted costs;
- Consumable costs (including materials used in R & D as well as light, heat and power)
- Software costs
- Certain other indirect costs
For a profitable company this means that for every £100,000 spent on R & D a profitable company will have a post tax cost of £55,000 i.e. a corporation tax saving of £45,000.
Is there any value to us as we are loss making?
The relief is particularly valuable for companies that are making losses and are looking to fund continued development work as there is a repayable tax credit of 14.5% meaning that for every £100,000 spent, £32,625 can be recovered from HM Revenue & Customs.
My company holds a UK patent (or pending), how much can I claim for?
‘Patent Box’ legislation offers an effective 10% corporation tax rate for companies in relation to relevant profits derived from the commercialisation of patents or patented products.
To qualify for the relief there must be an underlying UK or EU patent (or certain other specified countries).
This relief applies to global income not just UK or EU income and it includes:
- Income from the sale of the patented item, or an item incorporating it;
- Licence fee or royalty income from licencing patent rights;
- Income from the sale or disposal of the patent;
- Damages from infringement of patent rights.
- Notional royalties from patented manufacturing processes or services delivered using a patented tool.
If the patent is pending, your income will still benefit, but the relief is given in the year when the patent is granted.
If you are eligible for this form of relief, you may also be liable for the R&D relief (see above), allowing further reductions in corporation tax on qualifying expenditure.
Companies that undertake innovation in any area of their business would be well advised to develop their awareness and understanding of the opportunities for tax relief, financial support or support for business growth and we aim to work with clients to facilitate this and to pursue relevant opportunities.
Please contact your usual Menzies tax team representative or e-mail firstname.lastname@example.org