Amid all of the bad news surrounding Brexit unknown, there is now a real opportunity to review two of the most generous tax incentives available to innovative businesses: research and development (R&D) tax benefits and the patent box.
R&D tax benefits enable profitable companies to reduce their tax liabilities beyond the tax relief normally available.
Small and medium sized enterprises (SMEs) can claim an additional £24.70 tax relief over and above the £19 normally available for every £100 of R&D spend. This compares favourably to the £9.72 tax relief available to companies within the large company R&D scheme,
Where SME companies are loss making, they have the option to cash in their R&D tax losses at a rate of £33.35 for every £100 of R&D spend. Companies in the large company R&D scheme can reclaim cash of up to £9.72 for every £100 of the R&D.
The patent box is a reduced rate of corporation tax applied to patent related profits. Broadly it is a 9% discount (7% post 1 April 2020) compared to the main rate of corporation tax giving rise to a 10% tax rate.
Both the R&D and patent box tax incentives are framed around EU law.
Companies that are defined as SMEs (for R&D purposes), based on their size, may none the less fall within the less generous large company R&D scheme because they have received notified state aided grants in the form of EU funding. If the UK is outside of the EU could it be possible to remain within the SME R&D scheme by changing the definition of an SME to one that is not tied to the EU legislation?
One note of caution worth mentioning is that innovative businesses relying on EU funding to finance their R&D may find it harder to access external funding and will be disappointed as they may end up losing out.
New entrants to the Patent Box after 1 July 2016 fall have to comply with more stringent patent box legislation that, in many cases leads to a reduced patent box benefit compared to benefits under the pre-July 2016 rules. This reduction was introduced in order to bring the Patent Box scheme in line with EU law by ensuring that the UK’s scheme was not preferential, or anti-competitive, compared to other intellectual property regimes within EU countries. Now that the UK is outside of the EU it may be able to go back to a more generous regime.
When the UK people voted to leave the EU in 2016 this opened up the possibility for the EU constraints to be removed. Whilst we do not have a crystal ball, and what happens next is anyone’s guess, there is a real opportunity for the UK to remain an attractive place for innovative businesses to be set up. So the burning question is whether the government will be brave enough to take this opportunity and make this one of the good news stories resulting from Brexit?