Tax breaks for British R&D

For a spinout company, money will almost certainly be very tight for several years after formation, while R&D is funded and products and services are developed and launched.

Whilst universities can provide information and offer support initially, as a company matures it will have to look further afield for assistance.

The funding environment for spinouts and other SMEs has become much harsher since the financial crisis.  For example, the Regional Development Agencies have been abolished (at least in England and Wales) and the range of support now devolved to local councils and local enterprise partnerships has been reduced.

But it is not all bad news.  In recent years, tax incentive schemes have been developed to provide additional support for R&D active companies based in the UK.  Two flagship schemes are “Patent Box” and “R&D tax credits”, and there have been recent changes in relation to both of these schemes.

Under the Patent Box scheme, qualifying profits generated from patented products or processes are subject to a reduced rate of corporation tax.  Once the scheme has been fully phased in, the corporation tax on all such profits will be reduced from the normal 20/21% rate to 10%.

The scheme was introduced in April 2013 and so evidence of its effect on stimulating R&D is still limited.  However, Patent Box may provide a patent-active spinout with a valuable tax break, once the company starts to sell patented products or services.  Indeed, this may help to justify the investment in seeking patent protection in the first place.

Although only recently introduced, Patent Box has already been challenged on the European stage (by Germany), on the grounds that it will encourage artificial “funnelling” of profits through the UK by companies based elsewhere.  This has led some to speculate that the scheme could be abolished or made substantially less attractive.  Happily, a compromise appears to have been reached, whereby future eligibility will be based on where the R&D which generated the patented product/process was conducted.

At the time of writing, no formal announcements have been made.  However, if the compromise is put into effect, for spinouts based in the UK, Patent Box may continue to work largely as it does currently.

R&D tax credits were introduced back in 2000.  For SMEs, qualifying R&D expenditure may be eligible for corporation tax relief of 10%, or an equivalent tax credit.  Where a company is not profitable, the relief can be carried forward, or taken as a credit up to the maximum amount of PAYE and national insurance liabilities.

Critically, to be eligible for R&D tax credits, an SME must own any IP which might ultimately arise from the R&D in question.

In the 2014 Autumn statement, the chancellor announced some changes to R&D tax credits, effective from April 2015.  The relief/credit under the SME scheme has been increased from the amount of the qualifying R&D expenditure plus a further 125% of it, to the amount plus 130%.  This means that for every £100 spent on qualifying R&D, an SME will be eligible for tax relief or credit on up to £230 (up from £225).

On the flip side, the scheme has slightly tightened up on what qualifies as “R&D expenditure”, principally by excluding spend on materials used to make products which are ultimately sold.  These restrictions appear intended to make the R&D tax credit scheme focus more on actual R&D, rather than manufacture, and so may in practice have limited effect on early stage spinouts.

Dr Jeremy Bretherton
European Patent Attorney
Marks & Clerk LLP
Atholl Exchange, 6 Canning Street, Edinburgh, EH3 8EG
T: +131 221 7009

Posted on Wednesday, 06 May 2015