The Government consultations on reforming R & D tax credits and introducing a 10 per cent patent box are providing businesses with a rare opportunity to help shape the tax system for the hi-tech and life science sectors.
Whilst PwC is heavily involved in both consultations and regularly discussing the issues with HM Treasury, we would strongly encourage local businesses to get involved because they will have a greater influence on shaping the changes. The key changes are as follows.
The Government intends to introduce a Patent Box, which will allow companies to apply a 10 per cent corporation tax rate to net profits attributed to patents from April 1, 2013.
While it is disappointing that the patent box will only apply to income from inventions under patent, the good news is that it extends to income generated on any product that includes an element of patented technology, so for some businesses the benefits could be significant.
The Government has attempted to make the patent box as simple as possible, however, judgments and some complex number crunching will be required to identify the profits that are taxed at 10 per cent.
Companies may need to start planning now for the introduction of the new 10 per cent patent box to maximise the benefits and to adapt systems to capture the relevant financial information.
R & D tax credits
There are three key areas of proposed reform to R & D tax credits.
Firstly, a fundamental change to the structure of the relief which will allow the relief to become a genuine credit accounted for ‘above the line’. This would enable the income to be recorded in operating costs, reducing the cost of doing the R & D rather than tax. However, the Government has some reservations on this and therefore it is important for businesses to contribute their views.
Secondly, there are proposals to extend the large company relief to sub-contractors who provide routine services as part of a customer’s project. Currently, neither the customer nor sub-contractor are able to claim on this routine activity. This will be of particular benefit to contract research organisations, but many other organisations could also benefit from this change.
Lastly, there are welcome improvements to the Small and Medium Enterprises (SMEs) scheme. This includes increases in the level of relief from 175 per cent to 225 per cent, which makes the SME scheme very competitive compared to other jurisdictions. Although the cash-back benefit for loss making companies has only increased marginally, a positive point is that there are proposals to remove the PAYE/NIC cap on cash-back claims.
• If you think you will be impacted by the changes, we would strongly recommend you get involved in the consultation. If you would like further details, please contact Rachel Moore or Ludovic Black at PwC on 01223 552234.