Incentivising innovation
More widely in the East region, whilst there may be fewer lab coats, there is still a huge amount of innovation, problem solving and development happening.
The UK has a long-established priority to increase business Research and Development (R & D) spending, supported by generous Government incentives for companies that invest in innovation.
The UK offers a suite of powerful financial incentives designed to support the development and exploitation of intellectual property, including the Patent Box and R & D tax reliefs.
These reliefs are not new, but there have been a number of significant changes recently which will affect all businesses seeking to access them. Alongside those changes, concerns regarding abuse of R & D tax reliefs have led to an increase in HMRC scrutiny.
Against this backdrop of increased complexity and heightened risk, working with knowledgeable and reputable advisors when preparing claims for these reliefs is the best way to ensure that you access the correct level of funding as quickly and smoothly as possible.
Patent Box – Rewarding Intellectual Property
The Patent Box regime allows companies to apply a lower rate of corporation tax to profits earned from their patented inventions. Introduced to incentivise innovation and retain IP within the UK, the Patent Box can significantly enhance the profitability of tech firms that develop and exploit patented technologies and components.
The relief is for UK companies but includes income generated from worldwide sales of patented products. The Patent Box applies even if the patent relates only to a component part of the overall product.
Historically, patents have been seen as the remit solely of manufacturing firms, however with the pace of innovation in software technologies continuing, a broader range of businesses are being increasingly proactive in considering whether protecting their IP is right for them.
Any business carrying out R & D should consider options for protection of the resulting IP, and carrying out that exercise alongside advice on a potential Patent Box claim ensures that future tax savings can be maximised. Companies can elect into the Patent Box while a patent application is pending, so planning ahead is key.
Under the Patent Box, qualifying companies can benefit from a reduced corporation tax rate of 10 per cent on profits derived from patents and certain other intellectual property.
This compares very favourably to the standard rate, currently at 25 per cent, providing a substantial tax saving. For innovative businesses, this means that more resources can be funnelled back into pioneering research and development, fostering a cycle of continuous innovation.
R & D Tax Reliefs – Encouraging Innovative Research
The UK offers R & D tax reliefs to companies undertaking innovative projects. This incentive is designed to reduce the financial risk associated with developing new products, services, or processes.
There were historically two R & D tax relief schemes, one targeted towards small or medium sized businesses (SMEs) and the other designed for larger companies (the R & D expenditure credit or RDEC scheme).
From April 2024, these schemes have been reformed into a merged RDEC scheme, which is available to all businesses regardless of size, and an SME scheme specifically targeted to loss making R & D intensive SMEs.
The merged RDEC scheme provides a tax credit of 20 per cent of qualifying R & D expenditure, which can be shown ‘above the line’ in the company’s accounts, increasing visibility to stakeholders and generating a positive impact on profit before tax. The credit is taxable, resulting in a net benefit of 15 per cent for companies paying the main rate of corporation tax
Enhanced relief (ERIS) is available for loss making SMEs if at least 30 per cent of their total business expenditure is attributable to R&D expenditure.
This scheme allows eligible companies to deduct an extra 86 per cent of their qualifying R & D costs from their taxable profit, in addition to the normal 100 per cent deduction already included, making a total 186 per cent deduction.
Loss making companies can also claim a tax credit, worth up to 14.5 per cent of the surrenderable loss, resulting in a cash benefit of up to 27 per cent of the eligible R & D spend. The option of converting tax losses into a cash credit can be a lifeline for many early tech companies and companies can even elect to receive a credit for pre-trading expenditure.
Leveraging specialist expertise
Navigating the complexities of the Patent Box and R & D tax reliefs can be daunting. This is where working with experienced specialist teams can make a tangible difference.
Our experts can provide invaluable assistance in identifying eligible R & D projects and IP, advising on the records needed to support claims, identifying qualifying expenditure and preparing the financial calculations, spotting opportunities to access additional tax savings, protecting you from risk and dealing with HMRC on your behalf. But our specialists go further than that.
As well as navigating the intricacies of the tax legislation and preparing high quality deliverables, our team includes technical specialists experienced in a wide range of industries.
They have hands-on experience with development and engineering concepts which allows for meaningful direct engagement with technical teams and a deeper understanding of the innovative activities being undertaken.
On a practical level, we support clients in designing and implementing robust, real time data collection processes that bring an innovative approach to the claim itself, reducing management input, managing risk, and optimising the overall benefit to the business.
In the vibrant ecosystem of Cambridge, innovation is the lifeblood. The ‘Cambridge effect’ is far reaching and these financial incentives can make the difference between groundbreaking success and missed opportunity. Please do get in touch to explore the options.
• Please be aware that this is just a summary and will not cover all circumstances. For more detailed insight and specific advice, email Emma Queen – Emma.Queen@evelyn.com
