In the early stages of development of a technology business, tax is not always seen as important. This is largely understandable at a time when concentration on commercial factors is so crucial. Nevertheless taking control of tax matters may add considerable value to the business and reduce the risks of unpleasant surprises.Why is tax important
- At a time when cash flow is crucial, businesses do not want to incur tax costs which are greater than the resources concerned. R&D tax credits can give a positive cash injection.
- Some tax planning opportunities are only available at certain times in a Company′s development. It is important that such opportunities are not missed.
Research and development tax credits - Don′t miss out
Research and development tax credits are a generous company tax relief that can either reduce a company's tax liability or provide a sizeable cash rebate. As such they can represent an alternative, and often vital, source of funding for entrepreneurial companies.
It doesn't just apply to 'test tube' companies - it can apply to any company in any sector which addresses a scientific or technological challenge in seeking to develop or improve its products, processes or services.Many companies still do not realise that they are undertaking projects which could qualify for relief - that is why expert advice is crucial.Claims are common in the biosciences sector. They are perhaps harder to spot in a manufacturing or engineering context. If you are a window manufacturer trying to increase the thermal qualities of your windows, a food manufacturer trying to increase the shelf-life of your product or an electronics company trying to enhance chip data storage capabilities, you may be one of the wide range of companies that can benefit. Farmers or market gardeners seeking to develop hybrid crops have also been known to claim relief.There is a common myth that companies carrying out software development find it hard to qualify. This is not the case. Whether you licence software, provide software as a service or even write software for your own internal use, we would urge you to check your eligibility to claim.
There are two R&D tax relief schemes; the ′small and medium enterprise′ (SME) scheme and the ′large company′ scheme;
The system works by giving a 'super' tax deduction against taxable profits on qualifying R&D costs. A tax-paying company spending £100,000 could save tax of in the region of £25,000 (corporation tax rate of 20%). If an SME company is loss making it is possible to surrender losses in return for a tax credit repayment. This is particularly valuable where a company is 'pre-revenue', providing an often much needed additional income stream.Broadly, for R&D tax credits, SMEs are companies which, together with certain related companies/enterprises, have fewer than 500 employees and either turnover not exceeding 100m or total assets not exceeding 86m.
A company that is ′large′ for R&D tax relief purposes can claim a less generous super deduction and for costs incurred on or after 1 April 2014 it can elect into the new R&D expenditure credit (RDEC) regime. Under the RDEC scheme a loss making company can claim a net cash tax credit of up to 10% (11% from 1 April 2015) of eligible expenditure.
Can I get R&D tax credits as well as R&D grants
The rules in this area are complex, however, it is normally possible to benefit from both grant funding and R&D tax relief, although an SME is likely to be limited to the ′large company′ R&D scheme.
Are there special breaks for patents
Yes, since 1 April 2013 a special regime known as "Patent Box", with a headline 10% corporation tax rate, has applied for businesses exploiting patents and other qualifying intellectual property.
The key features of Patent Box are:
- The IP must be registered in the UK or Europe.
- The tax breaks apply to worldwide income that is taxed in the UK.
- It applies to existing as well as new patents.
- The benefits are claimable from when the patent has been granted but back-dated to the date of application.
- With careful structuring it is possible for subsidiaries of overseas parent companies using IP held elsewhere in the group to benefit from the rules.
- The 10% rate is being phased in over 5 years from 1 April 2013 starting at 15.2%.
These specific reliefs alongside generous tax reliefs for investors mean that the UK now has one of the most attractive tax regimes for technology businesses of any G20 country. The above article was published in
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