The UK continues to be one of the most attractive locations for businesses to innovate, and then hold and exploit the resultant intellectual property. Generous tax reliefs are available for companies of all sizes in all business sectors, including Research and Development tax relief, the patent box regime and video games tax relief (VGTR).
- What is R&D tax relief?
- What is the value of the relief under each R&D regime?
- Patent box tax relief
- Video games tax relief (VGTR)
- Other creative sector tax reliefs
Latest official statistics show that almost £5.3bn support was received by over 59,000 businesses claiming Research and Development tax relief alone in 2018/19 – a figure that has consistently increased by 20 per cent or more in recent years.
RSM has been a long-standing member of the HMRC R&D Consultative Committee, a group established by HMRC that includes representatives from HMRC, HM Treasury and other key stakeholders and advisers and which seeks to continually review the UK R&D tax regime and ensure it is focused on supporting businesses. Through its commitment to this working group, the Government’s support for businesses innovating in the UK is clear.
To qualify for Research and Development tax relief, a company must be looking to develop new or improved products, processes, materials, services or devices that represent an advance in science or technology through the resolution of scientific or technological uncertainty.
That’s the technical statement. In real practical terms, the application of the relief is incredibly broad, and can be relevant to almost any company, provided it meets the relevant conditions. RSM has advised a significant number of businesses each year in making claims across a diverse range of industries and business sectors – many that you wouldn’t naturally associate with ‘R&D’. These include the more traditionally innovative sectors, such as manufacturing, technology, pharmaceuticals and engineering, but also other less obvious sectors including construction, health and beauty, financial services, food and drink and retail.
Our specialists have deep experience in supporting companies of a wide variety of types and sizes in making successful R&D tax relief claims. This, combined with our close working relationships with HMRC’s R&D specialist units means that we can work with you to make robust, supportable R&D tax relief claims whilst minimising the time commitment for you and your teams.
There are two regimes for Research and Development tax relief: the small and medium sized enterprise (SME) scheme, and the R&D expenditure credit (RDEC) scheme for expenditure that doesn’t fall into the SME scheme.
An SME for these purposes is defined, in broad terms, as a company that has fewer than 500 employees, and either:
- annual turnover not exceeding €100m; or
- gross assets not exceeding €86m.
Where a company is connected with other enterprises, for example by membership of a corporate group or through a significant (greater than 25 per cent) shareholder, the relevant details for the company’s ‘linked’ and ‘partner’ enterprises must be included when applying these limits to assess the company’s status.
As such, investment by private equity, venture capital or institutional investors should be carefully reviewed to establish whether a company is eligible for claims under the SME regime.
The SME scheme
The SME scheme is more financially beneficial than the RDEC scheme, but there are restrictions on which companies are eligible to claim under it. The SME regime provides relief in two key ways.
- For tax-paying, profitable companies, it provides an additional tax deduction of 130 per cent (ie on top of the 100 per cent deduction it receives in any event) for qualifying expenditure (generally staff costs, both temporary and permanent, subcontracted costs, consumables, software licenses and a proportion of heat, light and power) that can be used to reduce a tax liability in a current, previous or future tax year. This gives a £43.70 gross deduction per £100 of qualifying spend, ie an additional benefit of £24.70.
- For companies that are loss making, a claim can instead be made to surrender their full 230 per cent deduction for qualifying R&D costs for an immediate cash payment at a rate of 14.5 per cent, giving an immediate cash flow benefit of £33.35 per £100 spent.
There are further conditions that can restrict access to the SME scheme where a company is in receipt of a subsidy or grant, where a company is acting as a subcontractor to a third party, or where going concern is an issue.
Although the value of the immediate cash payment is less than the value of the additional deduction against a tax liability, for many early stage businesses, the availability of immediate cash may be a vital bonus.
The RDEC scheme
The RDEC scheme is available to companies that fall outside of the SME size limits, or that are otherwise disqualified from the SME scheme (for example, due to receipt of subsidies or grants, or acting as a subcontractor to a third party).
Under the RDEC scheme, the benefit is delivered as a taxable ‘above the line’ credit (ie in the main body of the company’s income statement, before the tax charge), which, for expenditure incurred after 1 April 2020 is calculated as 13 per cent of the qualifying expenditure in the period, giving an after-tax benefit of 10.53 per cent (for costs incurred pre 1 April 2020, the rate was 12 per cent, giving an after tax benefit of 9.72 per cent).
The patent box is another tax incentive that seeks to encourage innovative businesses to base their activities in the UK. The regime is designed to offer a reduced (10 per cent) rate of corporation tax for profits attributable to products or processes on which a UK or EU patent is registered.
The relief was introduced in 2013, but substantially amended in 2016 to bring it into line with the OECD’s new international framework for preferential tax regimes for intellectual property, following the G20-OECD base erosion and profit shifting (BEPS) project.
The patent box regime is independent from Research and Development tax relief, but there are a number of areas of cross-over, with the intention that it follows on from R&D in a product life cycle, where the output is patentable.
RSM can help you to assess whether your company qualifies and assist you with any restructuring required to ensure relevant profits are eligible for the patent box. We can also introduce you to patent attorneys who can assist with patent applications.
VGTR was introduced for expenditure incurred on or after 1 April 2014 on eligible video game production, to bolster the video game sector in the UK.
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.
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.
There are additional tax reliefs available for a number of other creative sectors, as follows.
- High-end television (certain dramas and documentaries).
- Children’s television.
- Theatrical productions.
- Orchestral concerts.
- Museum and Gallery Exhibitions
The rules and, in some cases, the rates of tax relief vary for each creative sector tax relief. The common point is that they were all introduced to invigorate the UK’s creative sector industry, both to retain and attract investment and to have the UK stand out as a beacon of excellence for these industries.
Companies (or charities in some cases) are able to claim an additional tax deduction to reduce their corporation tax liability, or cash credits.
RSM has experience in helping a variety of companies to claim creative sector tax reliefs.