The current political and economic focus is on encouraging British companies to do what they excel at – innovation. This is bolstered by some very generous tax incentives.
Research & Development (R&D) tax credits represent an effective ‘subsidy’ of 26% to 33% of qualifying R&D expenditure, in addition to the ‘usual’ tax relief that the company would expect.
If the company’s R&D expenditure is funded by grants or third parties, a different form of R&D tax incentive applies, which can generate tax savings worth 8.8% of the funded R&D expenditure.
The Patent Box tax incentive was introduced with effect from 1 April 2013 and can be combined with a claim for R&D credits. It provides additional tax relief which halves the tax liability on profits from certain patents and patented products to just 10%.
Recent EU objections to the Patent Box have now been overcome and it is set to continue, although Patent Box benefits will increasingly be linked to the company’s underlying R&D expenditure.
These generous tax incentives bring with them opportunities for planning, but also some complexity. It is important to consider the overall commercial, accounting and tax position when devising appropriate planning.
The tax and accounting landscape for Innovation and Technology companies holds some potential complexities that need special consideration:
- Subcontracted R&D, which can affect eligibility for R&D tax credits and the scheme which applies.
- Funded R&D activities, which affect the schemes of R&D tax incentives which apply.
- R&D Expenditure Credits, which are reported differently in the financial statements and can affect the timing as well as the amount of tax payable.
- Corporate groups, where arrangements between companies can affect the R&D tax credits and also the Patent Box relief.
- ‘Capitalisation’ of development costs, where a company’s decision to report R&D expenditure as an asset, rather than as a cost in the year creates much greater complexity in the overall tax treatment of the costs and eligibility for R&D tax incentives.
- Interaction between R&D tax incentives and Patent Box, which will require companies to ‘track and trace’ their qualifying R&D expenditure in an appropriate way.
Hazlewoods’ Innovation and Technology Team helps companies to navigate their way through the tax rules to achieve the best outcome. We offer genuine expertise in R&D tax credits and Patent Box relief, combined with specialist tax knowledge in using these incentives in planning for the ‘bigger picture’.
In the year to April 2016, we helped our clients to identify qualifying R&D expenditure in excess of £27 million, generating tax repayments approaching £5 million.
This is one of the reasons we were awarded the prestigious Accountancy Age Award for Top 50 Tax Team of the Year for 2015 and were finalists in the Taxation awards for both 2015 and 2016.
If you would like some help or advice from our specialist team, please contact David Clift or Jemma Dixon on 01242 680000 for a free discussion.
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