It’s the start of a new decade and with that comes the chance to have a fresh look at everything that is happening in your business.
It is likely to be the most active decade for innovation that the world has ever known, with continuing advances in artificial intelligence and green technology and solutions to save the world, given even more focus by the competition announced over the New Year by the Duke of Cambridge with Sir David Attenborough. Innovation is surely going to be omnipresent!
You must also ask yourself the question, “Am I paying the right amount of tax?” When it comes to your corporate tax bill, which ultimately affects your profitability as much, if not more than most costs in your business, the question you should be asking is “Am I making the most of my available Tax Reliefs?”
Generally, Tax Reliefs are a legitimate way of reducing a company’s tax liability. Government have legislated tax reliefs for innovation, open to companies across all industries.
Research and Development Tax Relief
The definition of Research and Development for Tax Relief is “a company must be undertaking a project to seek an advance in science or technology through the resolution of scientific or technological uncertainties. The advance being sought must constitute an advance in the overall knowledge or capability in a field of science or technology, not a company’s own state of knowledge or capability alone.” Finally, a competent professional operating in the field mustn’t be able to readily deduce a solution.
There are two R&D Tax Relief schemes, the SME Scheme and RDEC Scheme.
The SME Scheme is for small and medium-sized entities who employ less than 500 people and have a turnover of less than €100m or a gross asset value on their Balance Sheet of less €86m, who are performing research and development at their own financial risk.
If you don’t meet these criteria or you are performing paid R&D for another company or you’ve received a grant or subsidy for your R&D then you can claim under RDEC.
The SME Scheme will deliver tax relief for a profitable company worth up to 24.7% of the eligible spend, a loss making company can surrender their loss up to a value of 230% of the R&D spend for a repayable R&D Tax Credit, which can be worth up to 33.35% of the eligible spend.
The RDEC Scheme is significantly less rewarding at around 9.72% of the eligible spend, but still quite a significant amount of cash.
If your company has actively participated in the development of a product that has been granted a UK or EU patent and you will be actively selling the patented item or a product with that patented item embedded within it, then you will be able to claim Patent Box. The patented item doesn’t have to be your own product, it could be someone else’s but you have to have been involved in the research and development of that product and more importantly you have to have an exclusive licence to sell that product within a “National” market.
The tax relief for a Patent Box claim is an additional deduction from the company’s profits that equates to a reduction in the tax charge on the profits derived from selling that product from 19% to 10%. The profits derived is a complex calculation and isn’t just a case of tallying up the sales and deducting the cost of sales.
The one thing to be wary of with a Patent box claim is that products with a low volume and or a low margin might well create a loss for Patent Box (which you really don’t want), it’s always best to calculate the value of a potential claim first.You can’t pick and choose your patents, it’s all or nothing!
Designed for Innovation
Both Patent Box and R&D Tax Relief have been designed to encourage businesses to seek Innovative ways to improve their existing products or processes or to develop completely new ones. R&D Tax Relief will soon be celebrating its 20th birthday and yet it remains widely underclaimed by businesses across all industries.
Both are also fairly complex and ideally you should seek expert advice that might be outside of your current accountant and tax adviser, if you’ve always been doing it, they are unlikely to tell you that you might qualify after 20 years!