Blog: Why you should be considering Research & Development and the Patent Box tax reliefs

Date: September 20, 2019

By Caroline Walton, Specialist Tax Consultant & Patent Box Lead at Catax

For many businesses, the term “R&D” (Research & Development) conjures up images of men in white coats working in laboratories. When asked to consider whether they might themselves be engaged in R&D activity, the answer is often a resounding no.

Whilst it is true that research and development is a staple activity of pharma companies, it is wrong to assume that R&D activity is confined to companies operating in the pharmaceutical sector.

R&D activity can, in fact, be found in any and all industry sectors and be present whether a company realises that it is engaged in R&D activity or not. It is a true fact that most companies which are engaged in the development or improvement of new products, processes, materials or devices will be carrying out R&D.

Given that innovation in terms of the development of new products or improvement of existing products is an essential part of business activity and business plan for a company looking to grow, it follows that “am I carrying out R&D” should be a question which each company should be asking itself and where for most, the answer will be a resounding yes.

The significance of whether a company is or is not carrying out R&D activity is relevant to its ability to be eligible to claim R&D tax relief. If a company satisfies the tax definition of R&D and has incurred qualifying expenditure in relation to its activity, it may well be eligible to submit a claim to HMRC.

The desired outcome of a claim for R&D tax relief is either a reduction in corporation tax payable where there is a future liability, a tax rebate where tax has already been paid, a tax credit where company losses are increased by virtue of a claim and surrendered or increased losses to be set off against future company taxable profits.

The amount of the relief claimable depends on the amount incurred on R&D activity and whether a claim is submitted under the SME regime or the large company Research & Development Credit (RDEC) scheme.

The benefit also depends on whether a company is (a) liable to corporation tax and claiming a reduction in tax payable or a rebate or (b) loss making and claiming a tax credit.

The value of a tax credit claimable by a loss-making company under the SME scheme is broadly less than a reduction in tax payable or a tax rebate to a company liable to corporation tax however is, nevertheless, worth claiming as cash now is usually preferred to using losses later.

Loss making companies are often start up businesses which do not expect to be in a profit-making position for some time and hence liable to pay corporation tax. It is common that directors of start-up companies are unable to pay themselves a salary in the early years and tax credits via the R&D SME scheme are often a welcome source of income to enable the business to grow, whether by taking on more staff, expanding into new areas or enabling the directors to be able to pay themselves.

R&D claims are, therefore, not the sole preserve of profitable companies; they should be considered by loss making companies also.

R&D tax relief is not the only tax relief which exists to reward UK companies carrying out innovative activity however. There is also the Patent Box and I lead the Patent Box at Catax.

Whilst R&D tax reliefs have been available to claim for a number of years now, the Patent Box is far more recent and only came into existence in 2013.  Despite having been introduced with the prime purpose of encouraging more innovation and patenting activity, it has had a somewhat slow start.

The key benefit of the Patent Box is that for any company which qualifies, it will be able to achieve corporation tax savings on qualifying IP profits of almost 50%.

You would think that with a potential tax saving of this amount, companies would be chomping at the bit to find out more and claim however this has not been the case to date. The latest HMRC statistics on the number of Patent Box claimants will be published in October however the statistics which have been published to date indicate low numbers especially when compared with the number of R&D tax relief claimant companies.

The reasons cited for this are well rehearsed and include the fact that the calculations are complicated, the benefits were unhelpfully phased in between 2013 and 2017 rather than being immediately available in full and the requirement to “elect in”.

From personal experience, I find that many companies I speak to (and surprisingly even the large companies with R&D teams and advisors) are not aware of the Patent Box. Surprisingly, despite the fact that the Patent Box has been in existence for some years now, many companies are still unaware of it.

For anyone in the position of advising a company on IP protection, IP strategy, IP commercialisation, IP valuation or M&A activity; it is remiss not to discuss the Patent Box with that company.

Everyone is aware that ownership of IP rights, including patents, provide value in their own right however how often do professional advisors think about the Patent Box as a potential contributing factor to their value? They should as the tax savings associated with IP profits from ownership and licensing of patents which qualify for the Patent Box can be significant.

Indeed, whilst many companies themselves may be put off patenting through cost concerns or a feeling that there is little point (because if somebody really wants to get around patent claims and copy something they will), the tax savings associated with the Patent Box may be reason to re-consider patenting.

For companies which have not previously had any dialogue with a patent attorney, it will be of interest to know that there are similarities between the legal requirements for patenting and the tax definition of R&D. Therefore, if you are carrying out R&D activity, you may be able to patent the result of your R&D activity.

In addition, the cost concerns which many companies have when considering patenting may be alleviated by understanding that firstly, it is not necessary to have to apply for world wide patent protection to be eligible for the Patent Box; a UK patent will suffice and secondly, the cost of applying for a patent will often be outweighed by the tax savings achieved. Provided that the qualifying IP is renewed and provided that IP profits continue throughout each accounting period, the tax savings are there to be claimed throughout the life of the patent.

Catax are experts in helping companies, large or small, to claim R&D and the Patent Box tax relief. We are headquartered in South Manchester but work with companies UK wide to make the most of the innovation tax reliefs which are available.

We have a team comprising dedicated technical account managers, specialist tax consultants and tax analysts who work tirelessly to identify qualifying R&D activity and associated expenditure to enable a thoroughly robust R&D tax relief claim to be submitted to HMRC and a team to help you identify whether you qualify for the Patent Box and to compile and present a claim.

For anyone who wishes to find out more about patenting, we have a network of patent attorney partners to whom we can refer you to make further enquiry.

Our aim is to be the innovation tax relief provider of choice.

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