Patent Box; Reducing the tax cost of your UK Innovation
In the 2010 Emergency Budget the Chancellor George Osborne outline da package of reforms with the intention of turning the UK into "the most competitive tax system in the G20". One particular area of ambition was to foster the UK as a hub for innovation. Fast forward 19 months and the Prime Minister David Cameron has spoken on innovation everywhere from the Conservative Party Conference to Silicon Roundabout - but what of the progress of those reforms announced at the Budget?
Within the overall frame work of the corporation tax reform, the two key areas set to deal specifically with innovation are a UK Patent Box and adjustments to the current Research and Development (R&D) tax relief scheme.
The key feature of Patent Box is a lower effective rate of corporate tax on profits attributable to UK or European patents - ultimately 10%. Patent Box will be applicable to all companies holding qualifying IP rights (QIPR) or an exclusive licence in respect of a QIPR, regardless of their activity or industry, and will apply to related profit from April 2013.
Whether a company holds qualifying rights - and is the first question to answer and depends on the following:
- Does the company own a patent or equivalent, granted in the UK Or by the European Patent Office?
- Alternatively, does it hold an exclusive licence for the use of a UK/European patent in at least a national territory?
- Has the company or, in general, another group comapony significantly contributed to the patent invention or product incorporating it?
- For companies in a group can the company demonstrate that it is actively managing the exploitation of the QIPR?
Once companies have determined their "in/out" status, the next step is to identify the method of quantifying what profit would be deemed relevant and hence taxable at the lower effective tax rate. Some general principles to bear in mind around this calculation:
- The legislation is aiming at making things simple by suggesting the application of a formulaic approach with a number of steps.
- One patent alone is sufficient to qualify a product, service or process that incorporates the patented technology.
- The formulaic method of calculating the Patent Box income is relatively intuitive. It takes the taxable profit attributable to QIPR, eliminates a routine return (profit not attributable to IP) and then strips out profit deemed to be generated from valuable marketing assets. Thsi formulaic approach, with all its steps, may not cater for all business models but there is a reasonable degree of flexibilty in the regime for the calculation to be adapted.
- Depending on circumstances transfer pricing principles may need to be employed in the Patent Box calculations, particulary for companies who have patented processes or deliver services.
- There aree certain short cuts on the Patent Box calculations for companies whose income falls below certain thresholds.
Changes to UK R&D
In October 2011's Autumn Statement, the Chancellor George Osborne announced the creation of an R&D "above the line" tax incentive as of April 2013.
Moving R&D "above the line" will reduce the cost of R&D in teh financial statements hence delivering a higher EBITDA. What the Government hopes is that this will translate into a larger budget for R&D and technology teams, and act as encouragement for companies to invest in R&D activities.
Moving R&D "above the line" scheme should also allow loss making companies to monetise the relief although the exact details of how this will operate are yet to be released.
Come Spring 2013 companies engaged in innovative activities will potentially have the ability to enjoy incentives from the creation and feasibility testing of an idea, right through to its commercialisation.
In order that companies are in a position to benefit immediatley from both Patent Box and amended R&D regime, we would recommend considering the following steps:
For both R&D and Patent Box, input into the ongoing consultation process to ensure that both create a sensible fit with your business.
For companies not currently claiming the R&D relief, now would be a good time to review activities. If a company is developing new products, processes, materials or services, there is a good chance that R&D relief will be available. Deloitte can assist with pinpointing relevant activities and making the claim to hmrc, and much of this work can be done on a contingent basis.
And for Patent Box specifically, assess the impact of the draft legisltion in order to:
- Identify whether a company can get "in the Box".
- Work through the guidance around creating a methodology for quantifying Patent Box income. While the mechanisims are not yet clear, HMRC have indicated that they are prepared to pre - agree this methodology so that companies know the financial benefit that Patent Box will bring to them, and stand to relaise that benefit as soon as the proposals become law in April 2013.
- Consider what other steps may need to be taken, for example the movement of patented activities into the UK, in order that the benefit of Patent Box is maximised.
Deloitte has a UK-wide Patent Box team comprising R&D, transfer Pricin, Corporate Tax, IP and Patent expertise. We are already working with companies on their response to these reforms and have built an industry - specific working knowledge around how to maximise the benefit of each.