Accessing UK Tax Reliefs for Innovation. Matt Foddy & Matt Foulger Grant Thornton Innovation Group

Transcription

1 Accessing UK Tax Reliefs for Innovation Matt Foddy & Matt Foulger Grant Thornton Innovation Group

2 Grant Thornton UK 4,500 people, 185 partners, 25 locations Worldwide Global network of independent member firms 40,000 people, 130 countries, 725 locations China 3,000 people, 160 partners, 22 locations China Britain Services Group 2016 Grant Thornton UK LLP. All rights reserved Draft 2

3 Agenda UK Corporation Tax regime and tax reliefs for innovation Research & Development tax relief The Patent Box regime International tax considerations Questions 2016 Grant Thornton UK LLP. All rights reserved Draft 3

4 UK Corporation Tax basics A UK resident company pays Corporation Tax on trading profits (income less expenses) and certain other types of profits (financial income, asset disposals, etc.) General principle is taxed on worldwide income and profits Current FY16 rate of CT is 20%, but this is falling FY17 to FY19: 19% and FY20: 17% Trading tax losses generally carry forward to offset future profits of the trade (with exceptions) Tax reliefs serve to reduce tax payable, and in some circumstances allow losses to be surrendered (no longer carried forward) for a tax credit (cash payment) from HMRC Grant Thornton UK LLP. All rights reserved Draft 4

5 Current tax reliefs for innovation R&D tax reliefs Two regimes depending on size of company SME s can access relief of 26% of qualifying R&D spend Research & Development Expenditure Credit for large companies worth c9% of qualifying R&D spend Both regimes incorporate a tax credit for loss making companies Patent Box 10% tax rate for profits attributable to patented technology 2016 Grant Thornton UK LLP. All rights reserved Draft 5

6 Tax reliefs for innovation continued Creative sector tax reliefs Tax relief for expenditure on video games, animation and high-end television. Also films and theatre productions. Research and Development Allowances Enhanced capital allowances (100% first year allowance) Other general established reliefs Capital allowances, tax efficient employee share schemes (EMI), tax relief for investors (EIS) 2016 Grant Thornton UK LLP. All rights reserved Draft 6

7 Research & Development Tax Relief 2016 Grant Thornton UK LLP. All rights reserved Draft 7

8 R&D relief background Introduced in 2000 (and 2002 for large companies) Relief for companies incurring qualifying R&D expenditure in a qualifying R&D activity Successive Governments have invested in the relief, and sought to make it easier to access, citing it as a key economic driver Latest figures show over 18,630 companies accessed the SME relief in FY15, receiving over 1bn in tax relief and tax credits In total (including large companies) 22,445 claims were made, amounting to 2.45bn of support 2016 Grant Thornton UK LLP. All rights reserved Draft 8

9 So, what is Research & Development? Key requirements Scientific or technological advance Scientific or technological uncertainty Use of competent professionals Solution not readily deducible 2016 Grant Thornton UK LLP. All rights reserved Draft 9

10 R&D technological advances An advance may be either developing something new, or making an appreciable improvement to existing science or technology An advance may be tangible (improved product, improved process) or intangible (new knowledge, cost efficiencies) R&D can arise where a new way of achieving the same result is developed via improved technology An advance is measured against the knowledge available in the public domain or the base knowledge of a "competent professional" A project does not have to be successful in order to qualify for R&D relief; indeed, failure can help demonstrate technological uncertainty 2016 Grant Thornton UK LLP. All rights reserved Draft 10

11 R&D technological uncertainty The solution is not readily deducible to a "competent professional Technological uncertainty exists when it is unknown whether something is technologically feasible, or where it is unknown how to achieve it in the practice System uncertainty can result from the complexity of the system rather than uncertainty about how its individual components behave. This is especially true in the field of software and computer science Uncertainty can arise where trying to take something that has been established as feasible into a cost-effective, reliable solution than can be used in the "real world" Routine/trivial work would not involve technological uncertainty 2016 Grant Thornton UK LLP. All rights reserved Draft 11

12 Common R&D myths / assumptions We don t develop new We products don t develop new products We don t do R&D We don t own the IP We are being paid We've only improved our internal systems 2016 Grant Thornton UK LLP. All rights reserved Draft

13 Qualifying R&D activities / industries Industries / sectors likely to involve R&D Pharmaceuticals Biotechnology IT, software & gaming Aerospace & defence Engineering Manufacturing Food & beverage Construction / architects Electronics / electrical Environmental & waste Printing & packaging Agricultural Textiles / fabrics Also Companies across any sector embracing technology to improve what they do Example internal use software Retailers installing EPS (electronic point of sale) systems bespoke to their business Manufacturers creating bespoke ERP (enterprise resource planning) systems Development / improvement of online presence Enhanced online systems Migrating legacy systems on to the cloud 2016 Grant Thornton UK LLP. All rights reserved Draft 13

14 Are we doing R&D Questions to ask 1. At the start of a project, did you think We re not sure of the best way to do this? 2. Have you developed new tools, products or services using technology? 3. Have you had to resolve technical problems with any of your products? 4. Have any of your projects failed for technical reasons? 5. Have you tried to improve your existing products through technical changes? 6. Have you experimented with new equipment or production techniques? 7. Have you found more efficient ways to produce your products or services? Answering Yes to any of these questions can indicate potentially eligible R&D activities 2016 Grant Thornton UK LLP. All rights reserved Draft 14

15 Qualifying R&D expenditure Revenue expenditure incurred in relation to a trade carried on (or to be carried on) by the company Staff costs Cash remuneration (salary, bonus, other cash payments) Employers NIC Employer pension contributions External Resources Externally provided workers Certain sub-contractor costs Software and consumables Annual software licences Materials consumed/ transformed Utilities Payment to qualifying bodies Universities Charities 2016 Grant Thornton UK LLP. All rights reserved Draft

16 R&D tax relief for profitable SME companies Cash value of R&D claims Assume a 100 spend SME companies pre 31 March 2015 SME companies post 1 April 2015 Extra deduction 125% 130% CT rate 20% 20% Tax saved Cash value 25% 26% 2016 Grant Thornton UK LLP. All rights reserved Draft 16

17 R&D tax relief for loss making SME companies Cash value of R&D claims Assume a 100 spend SME companies pre 31 March 2014 SME companies 1 April March 2015 SME companies post 1 April 2015 Extra deduction 125% 125% 130% Gross deduction 225% 225% 230% Loss surrender % 11% 14.5% 14.5% Cash repayment (eg 100 x 225% x 11% = 24.75) Grant Thornton UK LLP. All rights reserved Draft 17

18 R&D Expenditure Credits (RDEC) Taxable credit paid at a headline rate of 11% (10% pre 2015) The credit is payable (net of tax) to companies with no corporation tax liability RDEC It is available for qualifying expenditure incurred on or after 1 April 2013 Scheme has fully replaced the old super-deduction relief as of 1 April 2016 Aimed at large companies (more than 500 employees and turnover > 100m or gross assets > 86m) But SME s can claim where R&D is grant funded, sub-contracted to them, or subsidised by a third party 2016 Grant Thornton UK LLP. All rights reserved Draft

19 RDEC value of relief Year CT rate RDEC rate Value % value FY13 23% 10% 77, % FY14 21% 10% 79, % FY15&16 20% 11% 88, % FY % 11% 89, % FY20 17% 11% 91, % *Based on 1m of qualifying spend 2016 Grant Thornton UK LLP. All rights reserved Draft

20 R&D claims - commonly missed areas Failing to realise qualification under the SME scheme Missed categories of qualifying expenditure Reimbursed expenses/special pension contributions Qualifying indirect activities Funded/subsidised activities Connected party relationships & groups Research and development allowances 2016 Grant Thornton UK LLP. All rights reserved Draft 20

21 R&D claim preparation process Prepare report summarising claim (optional) Level of disclosure commensurate with value of claim Compare R&D grant application process! Include project write-up explaining how R&D (optional) Submit to HMRC as part of corporation tax return Window of two years from the end of an accounting period to amend a return to include a claim ( 2 year look-back ) HMRC aim to pay tax credit claims within 30 days of submission (not always met) 2016 Grant Thornton UK LLP. All rights reserved Draft 21

22 Patent Box 2016 Grant Thornton UK LLP. All rights reserved Draft 22

23 Patent Box overview Headline : 10% rate of corporation tax for profits derived from patents or sales of patented technology But restrictions for Routine return Marketing asset return Phasing in New relief introduced for relevant profits arising after 1 April 2013 First full years figures show 700 companies claimed 343m of relief, of these 1/3 were large claiming 95% of the relief SME s claiming less than 16m 2016 Grant Thornton UK LLP. All rights reserved Draft 23

24 Patent Box qualifying IP rights Company (or group co) must have been involved in the development of the patent Patents must be registered with UK IPO, European PO or PO of certain other EEA states Austria Estonia Hungary Romania Bulgaria Finland Poland Slovakia Czech Rep Germany Portugal Sweden Denmark 2016 Grant Thornton UK LLP. All rights reserved Draft

25 Patent Box qualifying income Proceeds of sales of patented products, including products incorporating patented items; and unpatented items intended to be incorporated into patented items Licence fees or royalties in respect of patents Proceeds of the sales of patents Patent infringement income Where the company uses a patented process to make a product, the 'notional royalty' that the company would have paid a third party for the use of that patented process 2016 Grant Thornton UK LLP. All rights reserved Draft 25

26 Patent Box the details Elect in via corporation tax return Relief being phased in from 1 April 2013 with full benefit from 1 April 2017 Year to 31 March Value of relief 60% 70% 80% 90% 100% Relief available for patents pending in year granted Rules drafted to compliment effect of R&D claims Additional deduction against profits (no ring-fencing) Beware Patent Box losses consider timing of entry 2016 Grant Thornton UK LLP. All rights reserved Draft

27 Patent Box the new regime from 2016 Overhaul of 2013 rules in response to European objections Application of R&D fraction limits value of relief where R&D giving rise to the patent done by connected persons for instance group companies (may need to track R&D spend against patents for up to 20 years!) Also, mandatory application of streaming rules (need to calculate separate P&L account for each patent), whereas could simply apportion under old rules Rules apply to new claims and new assets from 1 July 2016 and old regime phased out by 2021 What does this mean? Added complexity! Potentially little impact in value to companies that do their own R&D 2016 Grant Thornton UK LLP. All rights reserved Draft 27

28 International tax considerations 2016 Grant Thornton UK LLP. All rights reserved Draft 28

29 International considerations 2016 Grant Thornton UK LLP. All rights reserved Draft

30 Chinese tax footprint Sales Branch Permanent Establishment Tax China incorporated subsidiary 2016 Grant Thornton UK LLP. All rights reserved Draft 30

31 Double taxation UK company with Taxed on total company worldwide profits in UK 20% on profits Chinese branch / Permanent Establishment Taxed on branch worldwide profits in Ch or Withholding tax on Ch origin income/profits 25% on profits* 10% on income* But DTR Double Tax Relief? *for example purposes 2016 Grant Thornton UK LLP. All rights reserved Draft 31

32 Points to consider Does a Chinese taxable presence arise? Double taxation and DTR Branch exemption 税 Transfer pricing arm s length rule Withholding taxes consider before negotiating contracts Always preferable to give due consideration, and if appropriate, take advice in advance! 2016 Grant Thornton UK LLP. All rights reserved Draft 32

33 International points re UK innovation reliefs Expenditure re R&D sub-contracted to a Chinese company can qualify location of sub-contractor not relevant Consider the difference between collaboration and sub-contracting whose R&D, who bears economic risk and reward If incorporating a Chinese subsidiary, could sub-contract R&D to it from the UK and benefit from connected persons treatment, though this could impact future Patent Box claims China has its own tax reliefs for innovation including R&D 2016 Grant Thornton UK LLP. All rights reserved Draft 33

34 Questions? 2016 Grant Thornton UK LLP. All rights reserved Draft 34

35 2016 Grant Thornton UK LLP. All rights reserved Draft Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL).GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. grantthornton.co.uk