Patent box relief
First introduced in 2013, the Patent Box enables companies to apply a lower (reducing to as little as 10 per cent) rate of corporation tax to profits arising from patented products and equivalent forms of intellectual property. It is also seen as a complementary relief to the UK Research & Development (R&D) tax relief regime in supporting the development and commercialisation of intellectual property in the UK.
The patent box benefit is linked to the profitability of income streams derived from patents and certain other intellectual property (IP). There is a detailed calculation in the patent box rules which sets out how to obtain the reduced effective corporation tax rate, and carrying out this calculation forms part of the annual tax compliance process for companies that elect into the regime.
Companies that hold patents or similar IP rights should consider whether patent box can be applicable. Companies that use technologies which aren’t currently patented should bear the potential patent box tax benefit in mind when considering whether to apply for patents.
Eligibility for Patent Box
The potential for a company to benefit from patent box can be assessed in three steps.
- Is the company eligible?
- Does the company hold qualifying IP rights, or an exclusive licence in respect of such rights?
- How much profit does the company earn through exploitation of qualifying IP rights?
Where a company meets the criteria and has relevant IP profits at the end of a patent box calculation, the benefit is received through an additional deduction from taxable profits. The amount of the deduction is such that the effective rate of tax on those profits is 10 per cent.
1. Company eligibility
Companies of any size are eligible for patent box, provided that they are liable to UK corporation tax and make trading profits from exploiting qualifying IP rights.
2. What is a qualifying IP right?
The most common type of qualifying IP is a patent. Patents must have been granted by the UK Intellectual Property Office or by a specified European patent office. Some specifically listed other IP rights also fall within scope. A company may benefit if it holds the qualifying IP right itself, or if it holds an exclusive licence in respect of the qualifying IP right.
3. Relevant IP profits
Companies that are eligible and exploit qualifying IP rights must calculate the profit attributable to those rights in order to assess the benefit of electing into the regime. This involves performing an analysis of the income and expenditure associated with the qualifying IP rights, and making prescribed calculation adjustments.
The patent box operates alongside both the research & development (R&D) tax relief for SMEs and the R&D expenditure credit (RDEC) for large companies. Any benefit from the patent box can be achieved in addition to these R&D incentives.
For more information on patent box tax relief, please contact James Tetley.
Video games tax relief
The UK government has been boosting Britain’s creative sector for some years with generous corporation tax allowances and credits for certain activities. Video games tax relief (VGTR) is available for qualifying expenditure incurred on or after 1 April 2014.
If you have not already considered whether this relief applies, it is worthwhile doing so now. Even if you are already claiming relief, it is often the case that companies do not maximise their claims.
What is the benefit?
Companies undertaking video game production can claim an additional tax deduction, which could be worth up to 15.2 per cent of their qualifying production spend (this is dependent on the prevailing corporation tax rate) - and where loss making, there is scope to claim cash credits worth up to 20 per cent of qualifying production spend.
The qualifying production spend is generally the cost of design, production/programming and testing of the video game up to the point it is completed for delivery, albeit there are specific costs amongst these which are ineligible. For instance, costs relating to designing and producing an initial concept to determine whether a game is commercially feasible would not qualify for relief and neither do costs relating to debugging, advertising, publicity and post-release maintenance of a completed game.
Who can claim?
In order to qualify for relief, a video game must be certified as a British video game by the British Film Institute (BFI). The BFI applies a mainly points based system for this, with points awarded for the cultural Britishness of the game based on content, contributions, location of work, personnel, including characters, etc. These tests allow certain expenditure to take place outside the UK and relief is available for costs incurred throughout the European Economic Area (EEA).
Finally, there are a number of practical considerations that companies need to take into account in claiming VGDR, including the interaction between VGTR and R&D tax relief.
How can we help?
With substantial experience of creative industry tax relief claims, RSM is ideally placed to help companies in the following areas:
- Providing advice on how the scheme works and how to maximise the benefits
- Preparing or reviewing claims
- Assisting with BFI applications
- Auditor certification for final certificates
- Advice on the interaction with R&D tax relief (this in particular can be a complex area)
- Dealing with HMRC queries
For more information on video games tax relief, please contact Matt Appleton.
Creative sector tax reliefs
There are additional tax reliefs available for several creative sectors. The UK government has been boosting Britain’s creative sector for some years with generous corporation tax allowances and credits for certain activities.
If you have not already considered whether a creative sector tax relief applies, it is worth doing so, even if you are already claiming relief. Often companies fail to maximise their claims with enhanced tax reliefs and could possibly even get cash back from HMRC.
There are two elements to the relief:
- Additional corporation tax deduction
An additional deduction of 100 per cent of the qualifying expenditure used and consumed in the EEA (or 80 per cent of total qualifying expenditure if this is lower).
- Tax refund
Where the additional deduction results in a loss in the separate film production trade, the deduction (or the loss, where lower) may be surrendered for a tax refund of 25 per cent of the relevant amount.
The following creative sectors are eligible for the relief:
To qualify for the relief, films must be certified by the British Film Institute as a ’British film’ intended for theatrical release. Certain films (promotional etc) would not be eligible for relief.
High-end television (certain dramas and documentaries)
High-end television programmes that qualify for relief would need to be dramas, documentaries or comedies intended for broadcast with a slot length greater than 30 minutes. In addition, the average core expenditure per hour of slot length should be no less than £1m. Excluded programmes (for example, promotional/advertising) would not be eligible for relief.
To claim the relief, a company must be directly responsible for, and actively engaged in, producing the animation programme. Where a combination of non-animation and animation cinematographic techniques are used, the programme will be treated as an animation if over half of the total qualifying expenditure on the completed programme is spent on animation.
In addition, programmes must obtain certification from the BFI as a ‘British television programme’ and be intended for broadcast on television (including via the internet). At least ten per cent of the qualifying expenditure must be used or consumed in the UK. Certain programmes would not be eligible for relief, for example, those produced for advertising or promotional purposes, or those including competitions.
Children’s programmes have qualifiedfor the relief since 1 April 2015. No average core expenditure or slot length provision is required. Additionally, programmes such as game shows orquizzes can include an element of competition, provided the prize doesn’t exceed £1,000.
To claim the relief, a company must be directly responsible for, and actively engaged in, producing the theatrical production. This relief is also available for charities (where undertaking qualifying productions) and live performances (where performed for paying members of the public or provided for educational purposes).
To claim the relief, a company must be directly responsible for, and actively engaged in, producing the orchestral concert. This relief is also available for charities (where undertaking
qualifying productions) and live performances (where performed for paying members of the public or provided for educational purposes).
The following conditions would also need to be met:
- Consists of a minimum of 12 instrumentalists
- Majority of instruments must not be electronically/directly amplified
- The primary focus is to play to the paying public, or for educational purposes.
Museum and gallery exhibitions
To claim the relief, a company must be responsible for the exhibition at a single venue, or the first venue of any tour, and must make an effective creative, technical and artistic contribution to the exhibition. Alternatively, a company can claim where responsible for a touring exhibition.
Charitable companies which maintain museums or galleries can claim, as can companies owned by a charity or local authority which also maintain a museum or gallery.
Certain exhibitions would not be eligible for relief, for example where items are for sale or where connected to a competition.
For more information on creative sector tax reliefs, please contact Matt Appleton.