30 finance
BDO survey on the effectiveness of R&D tax relief and Patent Box
The Government sees technology innovation as a key driver of growth for the UK economy and offers targeted tax incentives, in the form of R&D tax relief and the new Patent Box regime, to encourage innovation and to ensure the fruits of those efforts remain in the UK, writes Paul Daly of BDO
The Thames Valley, with its many technology, science and manufacturing businesses, invests heavily in R&D and the creation of technology intangible property (IP). BDO has polled a number of local businesses as to the effectiveness of the two incentives in support of this.
The importance of innovation and IP to Thames Valley businesses was clear with 80% of respondents viewing IP management as crucial to the success of their business and 75% feeling that their business had a clear IP strategy. In addition, two thirds of respondents expect their attention to IP to increase over the next three to five years.
R&D tax relief is popular, with all those surveyed claiming the relief. The relief seeks to reduce the tax liabilities of UK companies and also offers cash payments/ credits if the business is loss making.
For SMEs, R&D tax relief allows an additional tax deduction of 125% on qualifying spend (eg a £1 million qualifying spend will give rise to a £2.25m tax deduction) which at the current headline corporation tax rate of 21% means an effective 47p of benefit for every pound spent. If the SME is loss-making then they will be entitled to a cash payment from HMRC of up to 32.625% of their qualifying spend.
The Government recently improved the R&D tax relief regime for large companies with the introduction of the Research and Development Expenditure Credit (RDEC) which offers a 10% credit against qualifying R&D expenditure thereby reducing the “above the line” cost of performing R&D in the UK. Large companies can still claim under the old 30% enhanced deduction regime if they prefer, although this will be phased out by April 2016. It should be noted that the RDEC offers a slightly better after tax benefit and also allows, for the first time, a repayment to loss making large businesses.
However, is R&D tax relief influencing behaviour by encouraging businesses to
www.businessmag.co.uk
invest more in their R&D? Only a third of those surveyed believed the availability of R&D tax relief had caused them to actually increase their investment in R&D. The reason for this is likely to be the ‘mission critical’ nature of innovation for technology reliant companies. What effect it may be having however is the preference to retain the UK as a location of the innovation effort – with only 10% of respondents actively considering offshoring their R&D efforts.
The volume of claims for R&D tax relief is increasing each year and the Government should be recognised for the regular improvements it makes to the regime
The other key tax technology related incentive is the Patent Box, introduced with effect from April 2013. It allows for a 10% corporation tax rate on profits arising from the exploitation of patents – in the form of licensing, sale of products containing a patented element, or services reliant on patented technology. The 10% rate is subject to a phased introduction and certain qualifying tests for eligibility must be met. Both SMEs and large companies are eligible for the same relief.
It is early days for the Patent Box regime and less than half of respondents with patents are actually claiming the relief. From the results it is clear that a disproportionate number of claimants were from established companies as opposed to start-ups.
As the regime is only really beneficial to those businesses that have taxable profits this is understandable and the policy is designed to encourage the UK-based exploitation of developed IP, and complements R&D tax relief which is applicable earlier in the life cycle of a company and its innovation efforts. Indeed certain synergies between the regimes have been designed into the
Patent Box relief and this is something we expect to see more companies taking advantage of as the regime beds in.
So, are the incentives effective?
The volume of claims for R&D tax relief is increasing each year and the Government should be recognised for the regular improvements it makes to the regime to make the relief as accessible as possible – both in terms of the rules and the way that the tax inspectors administer claims. Whilst interest in the Patent Box is at lower levels, it is still early days for this relief and it is expected its uptake will increase as awareness develops.
Whilst there are of course a wide range of factors that will determine a company’s strategy in this area, the Government should be encouraged by our findings that the majority of those polled found the incentives contributed to making the UK an attractive IP development and holding location. We would note, however, that as more governments internationally implement similar incentives, it will be key for the UK’s tax reliefs to remain current and effective.
Paul Daly is a tax partner at BDO LLP in Reading. To find out if your business might qualify for R&D tax relief or Patent Box, or to receive a full copy of the survey results contact Paul Daly on the details below.
Details: Paul Daly
paul.daly@bdo.co.uk 0118-9258512
THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2014
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60