There has never been a better time for companies to invest in Research & Development (“R&D”) in the UK. Not only can the company investing in R&D claim a R&D tax relief super-deduction under the very generous UK R&D tax relief regimes, but there is also the possibility of availing of the new 10% corporation tax rate under the Patent Box regime for registered Patents arising out of the innovative R&D work carried out.

The UK R&D tax relief regime was introduced for Small & Medium Sized Enterprises (“SMEs”) from 1 April 2000 and for Large Companies from 1 April 2002. Over the years since the introduction there have been a number of refinements and enhancements made to the rules, all serving to improve the regime's attractiveness.

What is a SME for R&D Tax Relief Purposes?

For the purposes of the R&D tax relief regime only, company is defined as a SME where it meets the following tests:

• Less than 500 employees; and
• Less than €100m Turnover; or
• Less than €86m Gross Assets.

Where a company does not meet these tests it is considered large and must apply the rules under the R&D tax relief regime for large companies.

How Has the Regime Been Made More Attractive?

A number of changes were made to the regime with effect from 1 April 2012, which served to further enhance its attractiveness. These changes involved the following measures:

• Removing the rule limiting a company's repayable R&D tax credit to the amount of PAYE and NIC it pays. The repayable R&D tax credit is available to a company investing in R&D, but incurring tax losses which can be surrendered in exchange for a cash payment, where the claim is made under the SME rules;
• Removing the £10,000 per annum minimum expenditure condition; and
• Increasing the additional deduction for R&D tax relief by SMEs by a further 25% making the total deduction 225% of actual expenditure – meaning that £100,000 of qualifying R&D expenditure by a SME equates to a corporation tax saving of £25,000, where the company pays Corporation Tax at the rate of 20%.

Additionally from 1 April 2013 new changes introduced referred to as the Above the Line (“ATL”) R&D tax credits permit large companies to cash in their tax credits arising from R&D expenditure incurred from 1 April 2013. This is discussed further below.

What is the Benefit of Claiming R&D Tax Relief Under the SME Scheme?

Using the example of £100,000 of qualifying R&D costs for the purposes of claiming R&D tax relief, a claim under the SME Scheme would result in the following:

R&D Tax Relief Claim Under the SME Scheme

Where the company is investing in R&D and pre-revenue, incurring tax losses, in making a R&D tax relief claim under the SME Scheme these losses will be increased further, and can be surrendered to HM Revenue & Customs in exchange for a cash payment. Assuming the same level of £100,000 of qualifying R&D expenditure with no other income and expenditure, the company will incur a tax loss as follows:

Repayable R&D Tax Credits Under SME Scheme

How Does the Claiming of a Grant for R&D Impact on R&D Tax Relief?

Additionally, it is worth highlighting that where a company has availed of a Grant for R&D for a particular R&D Project, for example from Invest Northern Ireland, it is still possible to claim R&D tax relief on that Project in addition to the Grant funding. Depending on the nature of the Grant for R&D and whether it falls within the definition of a “Notified State Aid” will determine the rate at which R&D tax relief may be claimed.

Where a company avails of a Grant for R&D which is defined as a Notified State Aid, the company's expenditure on the project which qualifies for R&D tax relief, will attract relief at the large company R&D tax relief rate of 130%, which based on a qualifying spend of £100,000 still equates to a corporation tax saving of £6,000 at a corporation tax rate of 20%.

Capital Spend on R&D Tax Relief Projects

Research & Development Allowances (“RDAs”) at the rate of 100% may be available on capital spend on R&D projects. This is particularly attractive in view of the demise of Industrial Building Allowances, and the reduction in rates of writing-down allowances for general plant and machinery.

The costs incurred on buildings, structures and plant in establishing or adding to an R&D facility are likely to be fairly significant, and therefore the availability of RDAs serve to help the cash-flow of investing in the overall project.

Above the Line (“ATL”) R&D Tax Credits

Up until 31 March 2013 only SMEs could claim cash back from HMRC in relation to R&D expenditure, but with the introduction of the ATL R&D tax credit, the new R&D expenditure credit will be payable at a rate of 10% of qualifying expenditure incurred on or after 1 April 2013. The new credit will be taxable, so nets to 8%. In essence the new regime is trying to:

• Allow companies to “cash in” the tax credit rather than carry forward tax losses to future taxable profits; and
• Facilitate, in accounting terms, the set off of the value of the tax relief directly against R&D costs in the profit & loss account that created the relief i.e. above the line accounting.

This reform is expected to have a positive impact on decision making in relation to R&D expenditure, in that R&D tax credit/cash back can be directly credited to the R&D cost.

The tax credit can ultimately be converted to cash, but HMRC, for protection purposes, has put in place detailed priority offset provisions against existing corporation tax liabilities and other taxes. Importantly there is also a maximum cash back cap in any year which is determined by the PAYE and NIC paid in respect of employees involved in the R&D activity. However, helpfully any excess may be carried forward to future years.

Companies have to decide whether to elect for the new tax credit regime or the super-deduction under the existing large company R&D relief regime. The existing R&D super-deduction scheme for large companies will cease in April 2016.

The Patent Box Regime

The patent box regime took effect from 1 April 2013. The essence of the legislation is to allow companies to elect to have a 10% rate of Corporation Tax on all profits attributable to qualifying intellectual property (“IP”). This change is good news for companies with patented IP in the UK or a UK company that could patent their technology in the future. These new rules will benefit companies from a wide range of industry sectors.

The full benefit of the regime will be phased in over the first four financial years following commencement on 1 April 2013. In the first year the proportion of relevant profits to which the 10% rate will apply is 60% and this will then increase annually to 100% from April 2017.

In addition to claiming R&D tax relief on the costs as they are incurred in developing new advances, there is then now also the opportunity to consider whether the developments can be patented, and to benefit from a lower corporation tax on those profits derived from the patent.

So, looking forward there are a number of extremely generous reliefs available to companies in the UK investing in R&D to stay ahead of the game, and in striving to differentiate their products and services. Any business engaging in developing new products or processes should consider whether an R&D tax relief claim can be made, and whether the new technology being developed is capable of being patented to avail of the extremely generous 10% corporate tax rate on profits attributable to the patent.

Caroline Keenan is Tax Director with ASM Chartered Accountants

Tel: 44 (0) 2890 249 222

Email: caroline.keenan@asmbelfast.com

Website: http://www.asmaccountants.com