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Patent box and R&D tax credits – musings from a recent presentation

Keltie LLP

K2 IP Limited

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This is not just any box. This is an HMRC Patent Box

We’ve written a fair amount recently on IPcopy about the UK’s patent box regime and R&D tax credits. However a few weeks ago we were treated at Keltie to a great presentation from Kevin Phillips and Andy Nash from Baker Tilly on both subjects from which I’ve extracted the following points that caught my eye/ear.

Patent Box

  • The UK patent box regime, which was originally proposed by Labour when they were in power, is now active (see also the IPcopy article here).
  • Compared to other patent box regimes around Europe the Qualifying Patent Box Income definition is very wide.
  • Although you need a granted patent to take advantage of patent box it is possible to include the profits arising during the application phase of the patent (in the 6 years prior to grant) at the point the patent does grant. This could therefore result in a large repayment of corporation tax in the year the patent grants. It is noted however that a company would need to elect in to the patent box regime during the application phase of the patent to be able to get this retrospective benefit.
  • Patent box can be applied in situations where the company is loss making. However, the outcome for any given company in this situation can be quite a subtle thing to calculate and it could go either way as far as whether it puts the company in a better position or not.
  • Early practical experience of patent box suggests that
    • there may be challenges in adequately defining intra-group arrangements and especially in meeting the “active ownership” conditions
    • some companies are mistakenly trying to include the “wrong type of patents”. In other words, Japanese and US patents!
    • It is not yet completely clear how the regime will work for companies incurring losses
    • licences need to be exclusive to allow the licensee to claim the relief
    • the sale of “items incorporating a qualifying item” falling within the regime may eventually be too good to be true!

Research & Development

The R&D tax relief scheme is a tax system that is designed to encourage UK R&D with tax reliefs available to UK companies who undertake qualifying activities. IPcopy has previously written about the R&D system here.

  • There have been over 85,000 claims for R&D tax relief since 2000 which equates to £8 billion in tax relief.
  • The company sector that Baker Tilly see most claims from is the software sector.
  • Software projects that include the following activities are eligible for R&D relief: Developing new algorithms, creating new search engines, developing software that allows the inter-communication of different software systems, improving speed (this is not an exhaustive list).
  • Example R&D claims have included: software for advertising slots for TV broadcasters, financial instrument trading platforms, perfume manufacturers, farming apparatus, stadium designs and many others.
  • Staff costs associated with qualifying activities, including pension contributions and employer NIC payments are eligible for relief.
  • HMRC look for the following in claims: a summary of a company’s R&D activity, the technological uncertainty that their research addressed, the ways in which the R&D project went beyond the current state of knowledge and why the research wasn’t readily deducible.

The presentation provided a good overview of the R&D and patent box systems with some practical hints and tips. What was interesting from my point of view was that the R&D system is likely to be available to software developments even in circumstances in which being able to obtain patent protection in Europe and the UK is difficult.

Mark Richardson 30 October 2013

Further reading – UK Patent Box – A boost to R&D? (Baker Tilly)


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