r & d credits and the patent box

RESEARCH & DEVELOPMENT TAX CREDITS& UK PATENT BOX REGIME

Summary of the new regimes

Vince Walker 29 April 2013

Copyright © 11 April 2023 BDO LLP. All rights reserved.

INVENTORS CLUB

RESEARCH AND DEVELOPMENT TAX CREDITS

RESEARCH AND DEVELOPMENTBENEFITS

• Monetary benefitsSmall companies

- For every £100 of qualifying expenditure, the company is entitled to an additional £125 deduction for tax purposes

- At a tax rate of 24% this equates to a benefit of £30 for every £100 of qualifying expenditure

Large companies

- For every £100 of qualifying expenditure, the company is entitled to an additional £30 deduction for tax purposes

- At a tax rate of 24% this equates to a benefit of £7.20 for every £100 of qualifying expenditure

• Cash repayment

• Tax R&D is different to accounting R&D

RESEARCH AND DEVELOPMENT

Per DTI Guidelines

• The Project must be seeking to obtain an advance in science or technology.

• Activities that are qualifying R&D are those that directly contribute to the advance, through the resolution of scientific or technological uncertainty (see examples)

• Does it qualify – it is considered from the viewpoint of a ‘competent professional in the field’

WHICH PROJECTS QUALIFY?

RESEARCH AND DEVELOPMENT

• Wages and salary costs

• Consumable materials

• Utilities

• Software

• Qualifying indirect overheads

TYPICAL QUALIFYING EXPENDITURE

PATENT BOX

The basics of the new regime

• 10% tax rate on patent profits

• Applies to new and existing patents – granted by HMRC approved patent offices

• From the effective date – accounting periods beginning on or after 1 April 2013

• Split year treatment for 2013 year ends

• Phase in over a five year period (60%, 70%, 80%, 90%, 100%)

PATENT BOX EXAMPLESale of a car

Patented steering wheel

Whole of profits from sale of car qualify

PATENT BOXPhasing in the 10% rate

Financial Year 2013-14 2014 -15

2015 - 16

2016 - 17

2017 – 18

% of reduced tax rate in force 60% 70% 80% 90% 100%

Main rate of CT (proposed) 23% 21% 20% 20% 20%

Small companies rate of CT 20% 20% 20% 20% 20%

Effective patent box tax rates:

Large companies: 15.2% 13.3% 12% 11% 10%

Small companies: 14% 13% 12% 11% 10%

The basics of the new regime

Conditions and computation

• Must be a ‘qualifying company’

• Computation of income in the box = three stage process

What is a Qualifying Company?

• Must hold relevant IP

• Qualifying IP rights, or • Exclusive licence in respect of qualifying IP rights

• Qualifying IP right

• Patent granted by UK or European Patent Office (plus certain other patent offices)

• Must meet the “development criteria”

Introduction to patents

IPO definition (paraphrase s1 Patent Act 1977)• Invention must be

New, include an inventive step

Be capable of being made or used in some kind of industry

• Invention must not be Scientific or mathematical discovery, theory or method

Literary, dramatic, musical or artistic work

Way of performing a mental act, playing a game or doing business

Presentation of information or some computer programmes

Animal or plant variety

Method of medical treatment or diagnosis

Against public policy or morality

Introduction to patents

• Traditionally a form of IP protection granted for up to 20 years Maximise the breadth of the monopoly protection (‘broad claim’)

Subject to ‘opposition’ and challenge

• (i) scepticism about value for smaller companies (ii) not traditional in some industries (iii) concern about public disclosure

• Specific industries - software

Determination of patent box profitsThree Stages

Stage 1: Identify qualifying net income

Stage 2: Extract routine profit element (10% mark up on costs)

Stage 3: Extract ‘brand’ value to determine patent profits

REMAINING PATENT PROFITS SUBJECT TO TAX AT 10%

Determination of patent box profitsStage 1

Stage 1a: Identify total gross income of the trade of the company

Includes

- Trade income- Credits brought into account for tax on the realisation of intangible assets and

pre-2002 patent rights

Excludes

- Income streams from financial assets and lending activities


Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income (from Step 1a)

Relevant IP Income

a) Actual income

1i) Income from the sale of qualifying items (i.e., an item protected by a qualifying patent)

1ii) Income from the sale of items incorporating a qualifying patent

1iii) Income from the sale of items wholly or mainly designed to be incorporated into a qualifying item (e.g., spare parts)

2. Licence fee or royalty fees for granting rights over qualifying IP or rights granted under an exclusive licence

3. Proceeds from realisation

4. Infringement income


Stage 1b: Identify proportion of “Relevant IP Income” as a percentage of total trade income (from Step 1a)

b) Deemed income

“Notional royalty income”

• Company holds a relevant IP right• Total gross income of the company includes any income derived from “things

done by the company that involve the exploitation by the company of that right, and

• That income is not itself relevant IP income or excluded income

Company can compute a notional royalty that is treated as Relevant IP Income


Stage 1c: Split trading profits according to percentage of RIPI/total gross income

Prior to any apportionment

• Add back any R&D expenses • Strip out any loan relationship debits and credit


Stage 2: Remove routine return to determine “Qualifying Residual Profit” (“QRP”)

• 10% mark up on certain costs

• Capital allowances • Costs of premises • Personnel costs • Plant and machinery • Professional services• Utilities and transportation


Stage 3: Remove marketing return to arrive at “Relevant IP Profits”

Either • Small claims relief • Take 25% of QRP out as a deemed marketing return • Remaining 75% (up to a maximum of £1 million) is left in the patent box

Or• Compute an arms length royalty rate on the marketing assets – “notional

marketing royalty”• Trade marks• Signs and indications or geographical origin of goods or services • Information about actual or potential customers

Example

BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business.

BDO is the brand name of the BDO network and for each of the BDO Member Firms.

BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms.

Copyright ©2012 BDO LLP. All rights reserved.

www.bdo.co.uk

r & d credits and the patent box

Technology