Amid the debate that has surrounded the devolution of corporation tax setting powers in Northern Ireland (NI) in recent years, it is worthwhile considering existing government-backed tax reliefs of which NI companies can potentially avail – in particular, Research and Development (“R&D”) tax credits and the Patent Box.

Fundamentally, the region’s uptake of R&D tax credits and the Patent Box simply does not reflect the level of innovation ongoing in NI today. This is clearly manifested in the most recent R&D statistics released by HMRC in September 2014 for the 2012–13 tax-year. While the data reflected a 26% increase in R&D claims on the previous year and showed evidence that since its introduction, £9.5bn has been received by UK companies in respect of R&D tax relief, when these numbers are broken down at a regional level, NI is notably under-represented. This is surprising given that the R&D tax credits system is by no means a new form of tax incentive.

First introduced in 2000, R&D tax credits are an established cornerstone of the UK corporate tax landscape. Since inception, these credits have been augmented and their framework extended to better suit the needs of growing businesses.

In the UK, there are two broad categories of R&D tax incentive schemes – one for small and medium sized enterprises (“SMEs”) and one for large companies, with the size of the benefit being directly correlated with the amount of qualifying R&D expenditure incurred by the company making the claim.

The generous SME scheme provides for an enhanced tax deduction which, as of 1 April 2015, has been increased to 230% of the qualifying R&D expenditure. In real terms, this translates to a cash tax saving of £26 for every £100 spent by an SME on qualifying research and development.

The benefit is also significant for loss-making SMEs as current year trading losses (or the total boosted R&D qualifying spend if lower) are available for surrender in return for a cash payment at a rate of 14.5%.

This cash should be remitted to the company within 30 days, with all SME claims mandated to be reviewed and processed by HMRC within one month. This applies equally to tax-paying and loss making companies.

Large companies can also benefit from R&D tax incentives. In its previous form as the Large Company scheme, which provided for an enhanced deduction of 130% of qualifying spend, there was no immediate cash benefit available for loss making companies. However, in recognition of the importance of cash flow to companies of all sizes, a cash repayment option has also been extended to loss-making non-SMEs.

This new credit-based approach to R&D tax relief for large companies (known as the Research and Development Expenditure Credit - “RDEC”) can also have a positive impact on a company’s EBITDA. Therefore, as cash is king and EBITDA is often a key metric of management performance, R&D is increasingly making its way from the workshops and labs and into a prime position within the boardroom. Non-SMEs claiming the RDEC form of the R&D regime can now receive a tax credit of 11% following the recent rate increase in April.

For such innovative companies with patents and other IP assets, the potential for relief is further extended through the Patent Box.

The Patent Box provides for a 10% rate of Corporation Tax, phased in until April 2016, which applies to profits arising from the exploitation of certain patents (broadly those patents registered with the UK Intellectual Property Office, the European Patent and the intellectual property offices of certain European countries). In practice, this means that if a patented component is incorporated into a larger product which is then sold, the entire profits of this end product potentially falls within the Patent Box. The mechanics of the calculation outlined in legislation ensures that any R&D benefit achieved through tax credits is in no-way diluted by this reduced rate.

While the Patent Box has come under scrutiny in recent times by certain EU member states for being too favourable within the wider context of the OECD Base Erosion and Profit Shifting framework, the Treasury has been robust in its defence of the incentive regime.

A consensus appears to have been reached by the relevant parties in the form of the Modified Nexus approach which represents an amendment to the original Patent Box. This amendment protects the substance of the original regime and was agreed in principle in November of last year, though has not yet been enacted in legislation.

The Modified Nexus approach requires that the benefit received through the Patent Box be proportionately linked to the R&D undertaken in developing the IP asset within the claiming entity as a proportion of the total R&D incurred in respect of the IP asset. Therefore, on the basis of the legislation as it currently stands, companies or groups undertaking all relevant R&D within the entity that owns or licenses the IP asset should feel minimal impact of this amended approach and can still fully avail of this lucrative incentive.

Considering the mechanics of the Patent Box, this reduced rate of tax is achieved through deduction in the annual tax computation. While this calculation does add a further layer of complexity, measures have been incorporated within the legislation to mitigate the potential administrative burden. The Small Claims Election in particular targets SMEs and smaller claims to offer a streamlined calculation to ensure that the efficiency of any such claim is retained.

As a result, this attractive incentive is certainly not reserved for large multinationals and should be carefully considered by any company in the UK which owns or holds an exclusive license over IP assets. This should also be extended to any company currently developing bespoke or innovative processes or technologies with the potential to achieve a patent. While such IP assets have clear commercial benefits, the added tax boost should be a further incentive to protecting this property.

Owing to these and other recent changes, there has never been a better time to invest in R&D and IP in the UK. Nevertheless, it has been our experience that local companies are often not claiming their fair share of these government backed reliefs. It is a sentiment that we have shared repeatedly in our frequent dialogue with HMRC.

Yet, that is not to say that R&D is not being carried out in NI On the contrary, our experience suggests that this could not be further from the truth. Through our client base we have clear visibility of the unprecedented innovation and pioneering development that is constantly ongoing in NI.

It is important to dispel the myth that R&D and IP are strictly limited to high-tech industries dominated by large groups, such as pharmaceuticals and aerospace design. Far from the perception of white-coated technicians in laboratories, we can see that it is being implemented in commercial farms, kitchens and workshops in locations stretching across the province.

Unexpectedly, even NI companies currently making R&D claims may also be arguably under-claiming such relief. In recent times, we have supported companies in making claims which have increased 20-fold due to recent HMRC guidance and legislative changes.

As a result of our work with companies of all sizes and across all industries, we have seen first-hand how such benefits have revitalised companies and allowed them to reinvest and expand well beyond their previous means. It can provide cash flow relief for loss making companies, release funds for training and recruitment or support borrowing for capital investment.

In order to see the tangible evidence of the benefits of fully exploiting these tax incentives, we need only look across the Irish Sea. Against the backdrop of the upcoming election, the state of the UK economy has been debated at length by all factions of the political spectrum. While the conclusions drawn vary widely, the facts clearly state that the UK has come a long way since the dark days of the most recent recession.

Unemployment figures have been returned to a level unseen since July 2008 and GDP is now growing faster than that of any other European economy. As a result, the UK currently enjoys its position at the forefront of the economic recovery within the EU.

Throughout this recovery, the Government has remained highly committed to IP tax incentives which have played a key role in developing a corporate tax system that is the envy of other developed nations.

With UK inbounds clamouring to reap the benefits of the UK’s IP driven tax system, it is incumbent on NI companies to ensure that they are maximising the tax reliefs available to them. With a view to achieving this, our advice to those currently claiming IP tax relief would be to evaluate current methodologies and ensure that the most recent rates and guidance updates are being applied. For those companies which have not yet considered the regime, you should not wait as the opportunity is too good.

Ian Edwards is Tax Director with EY.

Email: iedwards@uk.ey.com

Tel: 02890 443535