Is the Government paying you to be innovative?

There have been a number of incentives introduced to support companies to be innovative and undertake development of new products and services where these push the boundaries of current technical knowledge. Where these products and services are successful and earning the company profits then the Government has made it possible for about half of those profits to be exempt from corporation tax. But what does this really mean for you and can you afford to miss out?

For businesses that are developing new products that involve a step forward in technology or scientific understanding then they can qualify for enhanced tax relief in relation to the qualifying costs incurred on that development. For example, a SME company incurs qualifying expenditure of £10,000 on developing a new type of widget then instead of obtaining corporation tax relief on £10,000 it receives enhanced tax relief of 130% of the costs. This means the company receives a £23,000 deduction which reduces the corporation tax liability by £4,600, which is 46% of the costs.

But before you assume that you are not doing any research and development, this is not about people in white coats in laboratories. Instead it is all about people who are challenged with creating a new product or the solution to an existing problem where the way to meet this challenge is not obvious. In other words, there is an uncertainty about how to do this. So if this is you, then you are probably resolving a technological uncertainty and so could be undertaking research and development. Furthermore, even if you are not successful with the project then the costs still qualify for the enhanced relief.

In addition to this tax relief there are a number of grants available to contribute towards relevant development costs. Although these do reduce the cost to the business of the development, the tax relief is also reduced to only a 30% enhanced deduction. Therefore if the company spends £20,000 on a project and has a grant of £10,000 then the net qualifying cost is £10,000 and there is an enhanced deduction of £13,000 which reduces the corporation tax liability by £2,600.

Assuming that the product is developed and is good to take to market then you may wish to consider applying for a patent for it. There are many factors to consider in determining whether to apply for a patent, including the costs of application, the disclosure of your secret technology, the protection of your IP and the marketing value. However, since 2013 there has been an additional factor to consider which is the tax relief provided by the Patent Box regime. Under Patent Box a proportion of the profits arising from the worldwide sales made by the company of the patented items are exempt from corporation tax. By 2017 this could equate to up to 47% of the relevant profits.

Unfortunately, this regime is considered to be too generous by the EU and will be closed to new participants on 30 June 2016 but will continue until 30 June 2021. There is however a new Patent Box regime being introduced that will apply from 1 July 2016. Although this new regime is still being designed it is expected to be similar to the existing regime, however there will be a few more hoops to jump through and it is likely that less of the profits will qualify for the relief.

The good news is that provided the company has applied for a patent before 30 June 2016 then it can potentially still qualify for the current regime. The window is closing rapidly and therefore companies need to act quickly.

Trevor Shaw , Corporate Tax Director