Can companies get R&D tax relief on the money they receive from patents?
In short, yes. Companies are entitled to claim tax relief on any expenditure they have incurred from patents. It forms part of the UK government’s drive towards promoting R&D throughout the business world whilst boosting growth across as many industries as possible.
What exactly is R&D tax relief?
R&D tax relief reflects the government’s realisation that business development is highly beneficial, not just for companies themselves but for the wider economy. It has achieved this by rolling out the R&D Tax Credits scheme in the year 2000 for SMEs and 2002 for larger companies.
R&D Tax Credits have the power to transform a company by making growth through innovation a reality. They are an essential source of finance for companies to invest in the acceleration of their R&D projects by taking on new staff and moving their ideas forward.
Any company that spends money on enhancing existing products, services or processes, or that develops brand new ones to take to market, is likely to qualify for R&D tax relief. If one of your clients has spent out any money on innovation, it can make a claim for R&D Tax Credits to receive either a lump sum payment and/or a reduction in their Corporation Tax. Notably, the range of R&D that qualifies is massive, in fact it exists in just about every sector on the planet. Furthermore, if they’re claiming for the very first time, they can usually claim R&D Tax Credits for the last two accounting periods they’ve completed.
What company costs are eligible for R&D Tax Credits?
Here at Myriad Associates, when we put together a claim for R&D Tax Credits, we tend to look for these qualifying types of R&D expenditure:
- Payments for materials, as well as consumables such as light, heat, water and power that are transformed or used up in the R&D process
- Staff costs, including employer’s pension contributions, NICs, wages and reimbursed expenses
- Costs involved in taking on subcontractors, freelancers and agency workers
- Payments to volunteers that undertook clinical trials as part of the R&D process
- Certain types of software
What are the different types of R&D Tax Credit scheme available?
The R&D Tax Credit scheme under which a company makes its claim largely depends on whether it is an SME or a larger, more established company.
For this purpose, SMEs are classed as having less than 500 staff members as well as no more than €86 million in gross assets or €100 million in turnover. Most start-ups in particular will fall into this category.
Conversely, larger companies are considered to employ more than 500 people and must have over €86 million in gross assets or €100 million in turnover.
If your client comes under the SME category, it will need to make an R&D Tax Credit claim using the SME R&D Tax Credit scheme. If they are classed as a larger company, they must use the Research and Development Expenditure Credit (RDEC).
However, there are certain factors such as if the company has received an R&D grant that can bar access for SMEs to the SME scheme, so they will need to apply via RDEC.
I’ve heard of ‘The Patent Box’ - what is it?
‘The Patent Box’ refers to an initiative set up by the UK government to encourage companies to make more money from their patents. It has done this by offering some tax relief for earnings that have been made from patent sales.
How much can the patents tax relief be worth?
Patent tax relief is usually a reduced rate of 10% Corporation Tax that is applied to any profits made from the sales of a company’s “patented inventions”. This is half of the current 20% rate, so is well worth having.
Which companies can qualify for Patent Box tax relief?
Unsurprisingly when it comes to HMRC, there are quite a few stipulations and hoops for companies to jump through. If your client forms part of a group of businesses, it doesn’t necessarily follow that they are automatically excluded, it’s just that different rules may apply.
In a nutshell, in order to be eligible for Patent Box tax relief your company must:
- Submit a tax return that includes the payment of UK Corporation Tax
- Have undertaken eligible development on them, according to HMRC’s criteria
- Own the patent or have exclusivity in regard to licencing-in the patents
- Make a profit from the sale of patented items or other Intellectual Property where the rights are owned by the company
If your client can say yes to each of these, then it’s worth thoroughly examining what “qualifying development” means in their case specifically and which patents are included.
Which patents are included in The Patent Box?
If a patent has been issued by the UK Intellectual Property Office (or the European Patent Office) then it will be included in the Patent Box. It also includes patents that relate to human and veterinary medicines, plant varieties and plant breeding.
What does “qualifying development” mean?
This means that a company can’t just own the patent, it must also have either invented the original item which the patent relates to, or have developed a new product comprising the patented item. Only then will the R&D element of the tax relief be satisfied and the tax relief be successfully awarded.
Got a burning question or need some further advice?
Offering R&D tax advice to your clients that is 100% timely and accurate is absolutely vital. Not only can there be some serious money at stake, but any inaccuracies or HMRC investigations can cost both of you dearly, not just financially but time-wise too.
If you would like to discuss any issues raised in this article or wish to clarify anything regarding the R&D activities of one of your clients, please feel free to get in touch with us at Myriad Associates. We have many years of expertise in the R&D field and would be pleased to help in any way we can. Just use our contact page or call us on 0207 118 6045.