How Intellectual Property can lead to tax reliefs

It should therefore come as little surprise that tax authorities and governments around the world are interested now more than ever at seeking to tax their fair share of value generated from IP.

Naturally, this leads to new rules and complexities, as well as more tax enquiries, which can be extremely costly to settle. However, on the flip side, when you’re investing in innovation and IP creation, you can also benefit from a number of government incentives.

So we put together this brief overview to help you better understand how getting your IP story right, can ultimately lead to cash tax savings.

R&D incentives in the UK

Research and development is still a significant factor in driving innovation, growth and competitiveness in the UK and the government is committed to increasing investment into R&D to 2.4% GDP. Since the R&D scheme launched 20 years ago, over £30 billion of tax relief has been granted to companies making it a valuable and competitive incentive.

What benefits are available under the R&D scheme? See below depending on your businesses:

• SME and profit making: tax saving of up to 24.7% of your qualifying spend
• SME and loss making: cash credit of up to 33% of your qualifying spend
• Large company and profit making: under the R&D expenditure credit scheme you can benefit from an above-the-line taxable credit of 13%, which is roughly equal to a net tax saving of 10.5% of qualifying spend
• Large company and loss making: again, payable as a cash credit equating to a net tax saving of 10.5% of qualifying spend

When it comes to R&D claims, especially when you’re an SME, be mindful that your status can potentially change when you’re going through fundraising acquisitions and investment rounds. Consider the group as well as your shareholders and remember that SMEs can claim for projects that have been paid for by customers or subsidised through the large company scheme.

Consultations to be aware of

There are consultations currently underway to ensure that benefits from the R&D incentives are targeted at supporting companies in the UK. Here, the government remains committed to the R&D schemes and wants to broaden the scope in some respects, but it is expected that they will be restricting other areas as well.

New restrictions for SMEs:

• A proposed cap on a cash credit, which is equal to three times the company’s total PAYE and NICs liability for that year. This is likely to affect tech and biotech scale-ups who don’t have a big staff base and often contract third party suppliers to carry out R&D on their behalf.

• Genuine R&D businesses: Can you demonstrate active management of IP and how is this going to be evidenced going forward? Consider grant applications, board minutes, business plans

Data and cloud computing costs:

• This is a substantial cost to tech businesses who use a great deal of computing power. But HMRC are catching up to how companies do R&D in the modern day so companies can see huge benefits for data and cloud computing costs
• Both of these changes are expected to take effect from 1st April of next year.

Patent Box claims

Patent Box relief works by effectively providing a reduction in the rate of corporation tax to 10% on profits attributable to either qualifying patents (be they owned or exclusive licenced). For Patent Box purposes, the patent claims don’t need to be broad, a narrow patent can still benefit. People often think that patenting software is not possible but it is, in fact, doable.

Broadly speaking, patents need to be those granted by the UK or European patent offices. The patent must be granted in order to claim but the benefit accrues (up to six years) from the date of applying for the patent. A common misconception is that companies need to be profitable to benefit from the patent box regime. They don’t, they just need a business stream which generates taxable profits that are attributable to those patents. It’s possible for a business to have one area that’s profitable because of the patent and another area that’s loss making. That company can still receive a benefit from the profitable business stream, either through a tax refund (via interaction with the SME R&D regime) or increasing tax losses carried forward.

Finally, the Patent Box typically requires you to track and trace your R&D expenditure against the patent as the benefit can be limited to the extent the R&D has taken place in the UK. Therefore when looking at the Patent Box, the usual questions are: Where is your R&D spend incurred? Is it in the group companies? Third party? Where are your patents and other IP?

The UK Deloitte Private Emerging Growth team is running regular webinars for Founders and CxOs of fast growing businesses on a variety of topics to offer practical considerations and insights. You access our webinar library here.

The information contained in this article is intended to provide general information only and is not an exhaustive treatment of the subjects. Accordingly, the information in this publication does not constitute accounting, tax, legal, investment, consulting or other professional advice or services. Before making any decision or taking any action based on the information contained in the publication, you should consult a qualified professional adviser.