Finance Bill 2012 R&D and Patent Box details

As announced in the April budget, the Government has detailed changes to the way the R&D tax relief scheme operates and how they will be legislated for in the Finance Bill 2012 together with details on the forthcoming Patent Box legislation and which we cover below.

While many of these changes were previously announced, the draft legislation was published on 6 December 2011 giving detail for the first time of how the changes will be implemented.

The majority of the changes will affect companies claiming under the SME R&D scheme. These changes are:

  1. The rate of additional deduction will be increased from the current 100% to 125% for expenditure incurred on or after 1 April 2012. The total deduction for qualifying R&D expenditure will therefore be 225%. For a 20% tax payer, this will therefore produce a bottom line benefit of 25%.
  2. The rate of cash credit claimable by loss-making companies will be reduced to 11% of the surrenderable losses from the current 12.5%. This is necessary to keep within the EC state aid limits on the value of the relief due to the increase from 100% to 125% above. The effect of this is to reduce the amount of cash payable to the company from the current 25% of the enhanced losses to 24.75%.
  3. The vaccine research relief (VRR) will be withdrawn for SMEs with effect for expenditure incurred on or after 1 April 2012. This is expected to be hardly significant.
  4. The cap limiting the amount of the R&D cash credit to the amount of the company’s PAYE/NIC liability paid in an accounting period will be removed for accounting periods ending on or after 1 April 2012. This means that SMEs with small salary and wage bills, as a result of owners reinvesting the profits in the business, may now have access to increased cash refunds
  5. A company that is not a going concern may not make a claim under the SME scheme. The legislation clarifies that where a company is in administration or liquidation it is not a going concern and is excluded from claiming the SME scheme relief.
  6. The draft legislation removes the requirement for a company to spend at least £10,000 on qualifying R&D before it able to make a claim. This will inevitably benefit ‘micro’ companies performing eligible R&D.
  7. Contract Workers: Currently, where the R&D work is not carried out by employees, but where the labour is supplied by a staff provider, the existing rules have required exactly 3 parties for the costs to be eligible. For expenditure incurred on or after 1 April 2012 this restriction is removed. This will enable companies to claim for a wider range of costs where they have currently been precluded from doing so. This is particularly relevant to companies hiring IT contractors who operate through their own limited companies as well as a staffing agency.

The UK Patent Box Scheme will introduce a 10% tax rate on worldwide profits attributable to patents rather than the 24% corporate tax rate that will then be in force. The new regime will be phased in from 1 April 2013.

  • Companies with patented products or processes can benefit from the new regime. The patent box doesn’t extend to other categories of intellectual property such has trademarks and copyright.
  • To qualify, a company must own, actively manage or hold an exclusive licence over one or more patents registered in the UK or Europe.
  • A company must be actively involved in exploiting a patent by performing significant development or management of the IP.
  • The 10% tax rate applies to worldwide profits attributable to the patented invention. Qualifying profits include profits arising from licensing, disposals of patent rights and the sales of products which include patented inventions.

Profits falling within the patent box are calculated using a three stage formula:

1. Identify profits attributable to qualifying income (e.g. profits arising from the sale of products which include patented inventions).

2. Deduct a ‘routine return’ equal to 10% of certain costs to leave residual profits attributable to intellectual property. Costs qualifying for R&D relief are excluded here.

3. Deduct profits greater than 10% attributable to brand rights based on a notional brand royalty. The resulting amount less any actual royalty paid qualifies for the Patent Box.

In the first four years of a company electing into the Patent Box, actual R&D expenses will be compared to the average R&D expenses incurred in the prior four years. If the actual expenditure drops below 75% of the pre-Patent Box level (the “R&D floor”), then the R&D floor level will be substituted for the actual R&D expenditure at all points in the Patent Box calculation.

You should determine how you can get the most out of the Patent Box by:

  • Identifying where you benefit from patented items
  • Thinking about which method of calculation of Patent Box is most advantageous
  • Considering whether to patent types of technology that historically you may not have chosen to patent.
  • Considering whether to centralise patent ownership in the UK in order to maximise your benefit

The Government are demonstrating their commitment to business by increasing incentivisation for UK R&D. The Government have estimated that the R&D relief changes will cost approximately £60m per year while the Patent Box introduction will cost approximately £1bn per year. We welcome the on-going commitment to the improvement of the schemes, both through improvements to R&D relief and the introduction of the Patent Box.

For more information

Contact Micah Levy on 020 3004 9243 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it.