The devil will no doubt follow in the Finance Bill detail, but the heads up on IP tax points from the Chancellor’s statement today (23 November, 2016) is:
IP fiscal stuff:
- the new (post-1 July 2016) patent box rules are to be updated by adding provisions to deal with cost sharing arrangements so that companies using these are not advantaged/disadvantaged when it comes to calculating the R&D fraction
- ‘new spending’ of £4.7 billion between 2017 and 2021 to enhance the UK’s position as a world leader in science and innovation (whatever that means …), apparently to be rolled out as £425m in 2017-18, £820m in 2018-19, £1.5bn in 2019-2020, and £2bn in 2020-2021. This is apparently direct funding (grants) into an Industry Strategy Challenge Fund, to be modelled on the USA’s Defense Advanced Research Projects Agency programme, as well as allocating funding more generally.
- £0.7 billion to support the market to roll out full-fibre connections and future 5G communications
IP non-immediately-fiscal stuff:
- review tax environment for R&D to build on the R&D Expenditure Credit for large companies ‘to make the UK an even more competitive place to do R&D’
- more Science & Innovation Audits
HMRC have recently released statistics for take up of the patent box in 2013-14 (the first year of the relief); on the same day, they released the latest statistics on use of the UK’s R&D tax reliefs for the same tax year. They make for some interesting compare and contrast points:
Total claims in 2013-14
– patent box: 700
– R&D tax reliefs: 22,415
Total value of claims in 2013-14
– patent box: £342.9m
– R&D reliefs: £2.45bn
SME claims in 2013-14
– patent box: 475 (68%)
– R&D reliefs: 19,990 (95%)
Value of SME claims in 2013-14
– patent box: £15.7m (5%)
– R&D reliefs: £1.165bn (48%)
The largest claimant sector (for both patent box and R&D) is, unsurprisingly, manufacturing (63% of patent box claims; 30% of R&D claims). The second largest for R&D is Professional, Scientific & Technical, with about 20% of claims – but this sector only made 6.3% of patent box claims. This might relate to the nature of the patent box, and particularly the extra hurdle for claiming on services income. The other sectors are somewhat more difficult to analyse as numbers of patent box claims are so low that sectors have been combined to prevent commercial information being disclosed.
The R&D relief requires a company to be undertaking a project which seeks an advance in the global state of knowledge in an area of science or technology, it would seem logical that a successful R&D-relief qualifying project would often lead to something capable of being patented – and, in the 14 years for which we have R&D statistics, 141,000 claims for relief have been made. Fair enough, R&D relief claims can be made for unsuccessful projects, but out of 141,000 R&D relief claims, it seems pretty likely that there are more than 700 companies within the scope of the patent box … the report doesn’t speculate upon why the take up is so low in terms of numbers (and for comparison, the impact note when the patent box was introduced estimated the first year cost to the Treasury at £500m).
The UK announced on Thursday (22nd October) its (rather long awaited) proposals to update the patent box to make it compliant with the OECD BEPS proposals on amendments to patent/knowledge boxes. The UK proposals set out a series of questions for consultation, with draft legislation to come in December.
tl;dr version: it’s more generous that it might have been on grandfathering, but companies had better get their accounting software ready to do some serious work in order to keep track once into the new regime. The added complexities that will be added may well put off companies from claiming.
There are no proposals to include software copyright as qualifying IP, although the BEPS project does permit this – and the Irish knowledge box draft rules, published on the same day, do include software (and the Irish knowledge box offers a 6.25% effective rate. Just in case you wondered).
HMRC has published draft guidance on the new R&D expenditure credit for large companies (and small companies in some circumstances) for inclusion in the CIRD manual, together with draft notes and examples.
Well, we have the shiny brand new patent box proposals coming in April anyway, so there were no big expectations of this Budget – just as well, really!
There was one ‘direct’ IP announcement – the above the line R&D relief for large companies is increased to 10%, from the originally proposed 9.1%. This doesn’t sound much of an increase, but it’s a large improvement on the 6% that the current large company relief would be worth when the 20% corporate tax rate comes into effect. A blog post on ATL is in the works …
A ‘coming soon’ announcement was also hidden in the Budget documents – the Government plans to introduce consultation on tax reliefs for the visual effects industry. Presumably these will be modelled on the film/quality tv/animation/video games reliefs that we already have, but there’s no detail yet beyond the announcement of consultation.
There were quite a few indirect announcements – things that will benefit IP companies by benefiting companies and sectors in general, including:
– the 20% corporation tax rate: a bonus for large companies, and fairly predictable
– the NICs allowance of £2,000 per business, reducing the costs of employing people
– the extension of the capital gains tax exemption on investment via SEIS: useful for startups looking for funding
– then the grants etc funding, including £1.6bn for Industrial Strategy, part of which will go into a £2.1bn fund for aerospace; a £15m competition for digital content production; and £8m for the Skills Investment Fund, focussed on the digital content sector
– and finally, various initiatives intended to make it easier to raise finance. In theory.
HMRC have published the latest set of annual statistics on R&D tax relief claims (external PDF), indicating a rise of almost 9% overall in the number of claims (9.6% rise for SME claims, 5.5% for large company relief claims, and 6.6% rise in SME subcontractor claims). The value of relief claimed rose by 7.7% to £1.1bn (£340m in SME claims, £750m in large company relief claims).
There’s some support to the view that the credits may increase R&D expenditure – R&D spend by SME claimants increased 11.3%, and the R&D spend of large company claimants was 8.3%. The SME spend is now consistently increasing year on year, after a rather flat first few years. The effect of the economy also has to be taken into account; the increase in spend seems unlikely to be solely due to the credits, particularly in the large company where the relief is worth barely 7% of R&D spend. For reference, ‘background noise’ threshold on incentives is generally around 6% – where the benefit is less than that, it’s often too much hassle to claim the incentive. Once we reach the 22% tax rate, the benefit of the large company relief will be 6.6% of expenditure.
This year, the stats show the regional and industry analysis for the first time. The regional analysis is largely useless, as it’s based on the registered office of the company and so has a disproportionate number in London and the South East. Tax returns don’t show where money is actually spent. The industry analysis shows claims are made overwhelmingly in the business services and manufacturing sector – no particular surprise, particularly as ‘business services’ is a catch-all covering everything from generic R&D to property.
Finally, it’s somehow comforting to see that vaccine research relief claims continue to trundle along at 10 per year, as they always have done. It’ll be a shock if and when that number ever changes (which it might: the vaccine research relief can no longer be claimed by SMEs, so it’s not impossible that the stats in a couple of years time will show a different figure).
The consultation paper on the proposed ‘above the line’ R&D tax credit has been published (pdf). Key points from a speed-read are below (responses due by 29 June 2012 – we have some time!).
The Research and Development (Qualifying Bodies) (Tax) Order 2012 has been approved by the House of Commons, to come into effect on February 28th, 2012. The Order updates the list of qualifying bodies for R&D purposes – contributions to qualifying bodies can be eligible for the large company R&D relief.
In a report (pdf, on the SMMT website) published this week (and you have to love a report that starts with a quote from Julius Caesar), the manufacturing & motor associations EEF and SMMT call for changes to the R&D tax relief. They’re looking for a “cash benefit or redeemable credit at the point R&D costs arise”, rather than a “relatively opaque offset against corporation tax payments”.
HMRC have kicked off their R&D voluntary advance assurance pilot, previously trailed in the summer consultation.
The pilot is available to small companies only (those with fewer than 50 employees) making their first R&D relief claim. HMRC will assign volunteer companies to an R&D Relief expert, to provide support and advice on putting a claim together.
The aim of the pilot is to agree a basis for the first R&D claim and claims for the two subsequent accounting periods; where the claims are made on the agreed basis, there should no query from HMRC in respect of those three R&D claims. It’s not absolutely clear, but it seems that the agreement is on a per-company basis rather than a per-project basis – HMRC is presumably hoping that these very small companies will have no more than one R&D project at a time.
Companies wanting to take part in the pilot should contact their specialist R&D Relief unit – more details on the HMRC announcement page.
Editor’s note: I’d be interested to hear from any companies that take part in the pilot – what was the process like, has it made it easier to deal with R&D, that sort of thing.