An article written by members of Leyton UK which appeared in Intellectual Property Magazine October 2011.
Guang Deng, Eyad Hamouieh and Kate Keough of consulting firm Leyton focus on the patent box regime and if tax relief proposals will help UK businesses
The UK government has proposed to make a number of changes to corporation tax incentives to encourage companies to invest in research and development activities and retain high-value jobs in the UK.
The most predominant of these changes include the ongoing consultation on the introduction of a patent box regime and a range of small and medium enterprise (SMEs) – friendly amendments to the research and development (R&D) tax relief and credit schemes.
The patent box regime is designed to provide an additional incentive for companies in the UK to retain and commercialie existing patents and to develop new innovative patented products. Under the proposed model, companies can elect to tax profit generated as a result of patent sheld in the UK at only 10%, as opposed to the current 20% and 26%.
Whilst this is very attractive to UK businesses, there are practical challenges for both the government and taxpayer in striking a fair balance in order to efficiently incentivise IP retention in the UK. This may result in the application and relevance of this scheme being limited, especially to smaller businesses. For example, the creation and commercialization of patents can be a time consuming and costly process,often taking a few years to secure before commercialising, and not all businesses’ intellectual property is eligible for patent protection.
On the other hand, the R&D tax relief and credit schemes present a strong solution to these issues, in that the scheme is designed to focus company effort on innovation, and not just the result of that innovation, but the patentable IP. In addition, the claim process is much simpler than that required for patent applications. The IP does not need to be unique and for an SME meeting the right conditions, a cash repayment can typically be received within a month.
The coalition government has proposed a number of changes to this scheme following the 2010 consultation on their effective operation. They have also taken into account suggestions made by Sir James Dyson in his 2010 Ingenious Britain: making the UK the leading high tech explorer in Europe report, which encouraged increased fiscal support to SMEs by increasing the R&D tax relief available to 200%.
The most significant changes announced by the government, to be effected from this and through the following financial years, include:
•An increase in tax relief of 25% to 200% of qualifying expenditure for SMEs;
•The removal of a minimum qualifying expenditure of £10,000; and
•The removal of the cap of a company’s Pay As You Earn & National Insurance Contributions liability as the maximum potential amount to be claimed as cash credit. This is a clear boost for start-up companies where employment costs are typically kept very low.
Some of these changes would be very useful to SMEs, especially start-up companies where directors may not pay themselves to the level they are entitled in order to preserve cash. There are a number of cases where start-up companies could not claim the cash credit given in this cap. This move is certainly a step forward and demonstrates the government’s determination to help the smallest companies flourish.
However, despite these changes, the underlying issue with the current R&D efficient incentive, finding it difficult to allocate resources and not having the expertise to navigate the filing requirements and tax legislation.
The development and creation of IP is usually a strong indicator that R&D activities are taking place, however R&D activities may not necessarily generate IP. Consequently the scope for claims is wide and incorporates situations where another company may have already sought IP protection for a product similar to the one being developed by a company. There are situations where often a one-hour conversation could lead to significant savings to a company’s bottom line.
IP is crucial to the competitiveness of individual businesses and these enhanced incentives from the government clearly demonstrate how fundamental IP and the journey to its creation is to the British economy.
With professional advice, all businesses regardless of size or industry should investigate their eligibility to participate on Britain’s road to recovery.