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7th December 2020

Incentivising Innovation: R&D Tax Credits and The Patent Box Scheme

Introduction:

A guest blog by Ian Cowlishaw of Optima Design in Derbyshire.

R&D Tax Credits and the Patent Box scheme are UK tax relief schemes set up by HMRC to incentivise innovation in the UK. This helps support ambitious companies and the aim is that this will create more jobs and drive economic growth for the whole of the UK.

HMRC show from the data it has received, that it’s working.

Optima, a product development company, has been working with these schemes since their inception, on behalf of their innovative clients. Given our technical expertise in all things engineering and patents this puts us in the perfect place to aid the technical side of an R&D claim as well as identifying IP and getting patents granted for Patent Box purposes.

Optima identified a gap in the help given to companies from advisors, for technical expertise and combined use of the innovation incentives to benefit these ambitious businesses. So, in partnering with chartered accountants, R&D/Patent box experts and patent attorneys, Inovasi was founded.

R&D Tax Credits

What are R&D Tax credits:

The R&D tax credit scheme is a UK tax relief scheme to promote R&D. It supports companies that are investing in innovation. It helps companies to grow and in turn, the overall economy. Since the inception of the scheme in 2000 over £26 billion has been claimed and it is growing year on year.

With the SME scheme, companies are able to claim back up to 33p back for every £1 of qualifying expenditure spent on qualifying R&D

So what is qualifying R&D? HMRC has strict definitions of what is R&D for the R&D tax credits scheme. They can be very complicated with a lot of “grey” areas, which is why it is advised to have a specialist aid you with this. In short, HMRC considers R&D “Work that advances overall knowledge or capability in a field of science or technology, and projects and activities that help resolve scientific or technological uncertainties, may qualify for R&D relief.”

This can be explained in 4 main points:

  • Technical advance, the project should aim to create an advance in an overall field of science or technology. This could be a new process, product or service, or improving an existing one.
  • Science and technology, HMRC is stringent on the fact that the advance must occur with an in area of science and technology. This excludes the social sciences, humanities, and the arts. In addition to this, it is not enough for it to simply be commercially innovative.
  • Technological uncertainty, it should be difficult for a competent professional in this field to figure out how to solve the uncertainty, often this can show itself in trial and error or several iterations.
  • Competent professional, it is important that the technical lead for the R&D project is a competent professional within the science or technology you aimed to advance. This can be qualifications or experience.

What is Qualifying Expenditure?

There are many different costs that are and aren’t eligible for R&D Tax credits and understanding the intricacies of them is very important to have a valid claim.

What is eligible:

  • Employee costs
  • Subcontractors and EPW’s
  • Software costs
  • Consumable costs

What is not eligible:

  • Capital expenditure
  • Patent costs
  • Rent or land costs
  • Production or distributions costs

How to make a claim:

To make an R&D claim you must write an R&D report that includes all the required technical information that demonstrates to HMRC that the projects undertaken at your company were in fact qualifying R&D. As well as this, they need a break down of all the costs associated that make up the claim. This should then be sent to support the claim made in your CT600 tax return form.

This can be a laborious job that takes a lot of understanding of the HMRC R&D tax credits legislation, and if done incorrectly it can result in an inquiry from HMRC that could lead to a penalty.

For this reason, we would always suggest using an R&D specialist. At Inovasi we take the time to understand you and your business and we take all the heavy work away from you and can ensure a robust and compliant report will be sent to HMRC to support your claim. In the unlikely event of a random inquiry, we will act on your behalf and show to HMRC how the project and costs associated are indeed qualifying. No need for you to worry.

The Patent Box Scheme

What is the Patent Box scheme?

The Patent Box scheme is a HMRC tax relief incentive that allows you to get a reduction in your corporation tax of up to 9% on any IP generated profits. Initially introduced in 2013 phased in slowly and having only come into full effect in the last few years. Over £4.9 billion has been claimed since its inception, despite this, it is still underutilised by many companies. In 2017-2018 as little as 920 SME’s made a claim.

Qualification criteria:

– Be a UK limited company

– Be subject to normal UK corporation tax

– Own or license a patent

– Generate profit from this IP

What if I don’t have a patent?

This scheme has been developed to incentivise companies to develop IP and reward those who have already done so. Many companies, however, do have significant IP but are yet to have this show itself in the form of a patent. This is why Optimas’ new venture Inovasi is well placed with its deep background in IP development and its patent attorney to be able to identify the patentability in a business’s IP and get it granted, with Inovasis’ streamlined process it is cheaper and faster than most alternatives.

Outro:

The importance of R&D Tax credits and the patent box scheme should not be underestimated in its ability to support innovative companies, and henceforth the economy of the UK as a whole, as well as tackling many challenges we face by overcoming them with technology.

The use of all the innovation incentives, when you include grant funding as well, all overlap and affect one another. You can drastically reduce your benefit from these schemes by not understanding how they interact. This is why they have to be carefully thought out ahead of time and handled by experts who can maximise the benefit while reducing any risk of false claims and wasted time.

If you would like more information or just a chat to see if you might be eligible for these schemes just contact us at www.inovasi.co.uk or www.optima-design.co.uk

The Ignys Team would like to thank Optima for writing this blog for us. Optima is one of Ignys’ valued partners.