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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:
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:
Data and cloud computing costs:
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 High 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 can register for the webinar series 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.
Reena is a highly experienced R&D tax practioner with 14 years’ experience, working with a wide range of companies, with particular focus on Fintechs, Technology and Lifescience industries. She leads a team in providing assistance to privately-owned and PE-backed businesses, especially high-growth companies claiming under the R&D scheme for SMEs. Reena is a qualified Chartered Accountant and also has a degree in Chemistry. Prior to joining the Innovation Tax team, Reena trained as a financial auditor. Her several years of auditing experience helps to bring a broad insight into the accounting and costing systems of companies. She assists companies to devise appropriate methodologies, and reviews existing claim processes to make recommendations on areas that may be challenged by HMRC. She also has a particular technical expertise in reviewing SME status of companies. She is passionate about helping start-ups to get R&D tax credits and works closely with Propel by Deloitte to help companies in this sector.
Shaun is an Associate Director in our High Growth - Private Markets Tax practice. He works with tech enabled high growth businesses, specialising in transactions and international tax advice. He has extensive experience in supporting clients from early fund raises all the way through to IPO and beyond.