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A recent report highlights that the United Kingdom’s growth in Research and Development (R&D) tax incentives is falling behind other OECD countries.
This trend raises concerns about the UK’s ability to remain competitive in attracting innovation-driven businesses.
Let’s explore the details of this issue and its potential implications for the UK’s economy.
R&D tax incentives are government initiatives designed to encourage businesses to invest in research and development activities.
These incentives often take the form of tax credits, deductions, or grants, reducing the financial burden of innovation.
The UK has long been recognised for its generous R&D tax schemes, but recent findings suggest that its growth in funding these incentives has stagnated compared to other OECD nations.
Several factors contribute to this trend:
For UK businesses, the stagnation in R&D tax growth poses challenges:
Innovation is a key driver of economic growth, and R&D incentives play a crucial role in fostering it.
If the UK fails to keep pace with other countries, it risks losing its competitive edge in sectors like technology, pharmaceuticals, and manufacturing.
The UK’s declining R&D tax budget growth is a wake-up call for policymakers.
To remain an innovation leader, the country must prioritise consistent, generous incentives that encourage businesses to invest in R&D.
If you have any queries about this article on incentives, or tax matters in the United Kingdom in general, then please get in touch.
Alternatively, if you are a tax adviser in the UK and would be interested in sharing your knowledge and becoming a tax native, then there is more information on membership here.
The UK Patent Box regime, which offers a reduced corporate tax rate of 10% on profits derived from UK or European patents, remains significantly under-utilised by UK companies.
According to the latest available data, only around 1,510 UK companies took advantage of the Patent Box system in the financial year spanning April 2021 to March 2022.
This figure is starkly low when compared to the 4.7 million incorporated companies registered in the UK as of 31st March 2021—a number that includes those in the process of dissolution or liquidation.
To put this into perspective, out of approximately 4.4 million active companies at the time, a mere 0.03% are benefiting from this lucrative scheme.
The Patent Box regime is designed to complement existing incentives that provide corporate tax benefits for research and development (R&D) expenditures.
While R&D tax relief supports companies with the upfront costs of qualifying R&D activities, the Patent Box provides ongoing tax relief for businesses that choose to retain and commercialise their innovations within the UK.
Together, these regimes aim to support the entire innovation lifecycle for UK businesses.
One possible reason for the low uptake could be the confusion between the Patent Box and the more widely used R&D tax credit scheme.
While both offer significant financial benefits, they serve different purposes and can be utilised in tandem to maximise tax relief.
As the numbers show, there is a clear opportunity for more UK companies to explore the advantages of the Patent Box and reduce their tax liabilities.
The Patent Box regime is available to all companies, regardless of industry. To qualify, a company must meet the following criteria:
The first step in calculating the benefit under the Patent Box regime is to determine how a company’s QIPR maps to its qualifying income, which can include:
Finance income is excluded from the regime.
Once the qualifying income is identified, further adjustments are made to calculate the profit attributable to the QIPR, which is then eligible for the reduced 10% tax rate.
From 1 July 2016, significant changes were introduced to the Patent Box regime, impacting all new claimants from that date.
These changes require companies to demonstrate a clear link or “nexus” between their R&D activities and the tax benefits derived under the Patent Box.
This means that companies need to track and report relevant R&D expenditures alongside their Patent Box claims.
For companies operating under the previous regime, “grandfathering provisions” allowed them to continue under the old rules until 30 June 2021.
After this date, all claimants must comply with the new rules, necessitating the tracking and tracing of R&D expenditures from 1 July 2016 onward.
The UK Patent Box regime offers a valuable yet under-utilised opportunity for companies to significantly reduce their corporate tax rate on profits derived from patented innovations.
With only a fraction of eligible businesses currently benefiting from this regime, there is a clear need for greater awareness and understanding of how it can complement existing R&D tax reliefs.
By proactively assessing eligibility, optimising claims, and ensuring compliance with the latest rules, companies can unlock substantial tax savings and support their long-term innovation strategies.
The potential benefits are too significant to overlook, making it essential for more businesses to explore and take advantage of the Patent Box regime.
If you have any queries about the UK Patent Box, or UK tax matters in general, then please feel free to get in touch.
Cyprus has long been recognized as a strategic location for businesses looking to optimize their intellectual property (IP) management.
In 2016, Cyprus further enhanced its appeal by aligning its IP Box Regime with EU regulations and the OECD’s Base Erosion and Profit Shifting (BEPS) Action 5 rules.
Recent amendments in 2020 to Section 9(1)(l) of the Income Tax Law have introduced significant tax advantages for intangible assets, reaffirming Cyprus as a prime destination for IP-centric companies.
The 2020 amendments came at a crucial time, offering tax exemptions on incomes derived from the disposal of intangible assets, effectively exempting them from capital gains tax since January 1, 2020.
This move aims to boost innovation by making it more financially viable for companies to invest in IP development.
Cyprus stands out in the EU for its competitive IP tax regime. As a member of the EU and a signatory to all major IP treaties, Cyprus ensures robust protection for IP owners.
The IP Box Regime in Cyprus offers one of the most advantageous programs in the EU, characterized by low effective tax rates, a broad range of qualifying IP assets, and generous deductions on gains from disposals.
The regime’s hallmark is the substantial tax exemption provided for IP income.
Specifically, 80% of worldwide qualifying profits generated from qualifying assets is deemed a tax-deductible expense, and the same percentage of profits from the disposal of IP is exempt from income tax.
This arrangement results in a maximum effective tax rate of just 2.5%.
Qualifying Assets (QAs) include patents, certain software and computer programs, and other legally protected intangible assets that meet specific criteria, such as utility models and orphan drug designations.
These assets must be the result of the business’s research and development (R&D) activities. Notably, marketing-related IP such as trademarks and brand names does not qualify.
The regime employs a nexus approach to determine the portion of income eligible for tax benefits, relating it to the company’s actual R&D expenditure.
The formula for Qualifying Profits (QP) considers the ratio of qualifying R&D expenditure and total expenditure on the QA, fostering a direct link between tax benefits and genuine innovation efforts.
Qualifying Expenditure includes all R&D costs directly associated with the development of a QA, such as salaries, direct costs, and certain outsourced expenses.
However, acquisition costs of intangible assets and expenditures not directly linked to a QA do not qualify.
Entities eligible for the Cyprus IP Regime’s benefits include Cyprus tax resident companies, tax resident Permanent Establishments (PEs) of non-resident entities, and foreign PEs subjected to Cyprus taxation, provided they meet certain criteria.
The Income Tax Law amendments also introduced capital allowances for all intangible assets, allowing for the spread of these costs over the asset’s useful life (up to 20 years).
This provision supports businesses in managing the financial impact of large IP investments over time.
Moreover, the regime permits taxpayers to opt out of claiming these allowances in a given tax year, offering flexibility in tax planning.
Upon the disposal of an IP asset, a taxpayer must provide a detailed balance statement to determine any taxable gains or deductible amounts.
With its favorable IP Box Regime and recent legislative enhancements, Cyprus continues to cement its status as an attractive location for IP-rich companies seeking tax efficiency within the European Union.
Companies operating in high-tech and innovative industries should consider Cyprus for their IP management and development activities, benefiting from substantial tax incentives and robust legal protections.
If you have any queries about this article on Cyprus and Intellectual Property, or tax matters in Cyprus more generally, then please get in touch.
When it comes to Research and Development (R&D) tax incentives, it is becoming clearer and clearer that maintaining compliance with regulatory standards is crucial.
A recent case, Active Sports Management Pty Ltd and Industry Innovation and Science Australia [2023] AATA 4078, exemplifies the rigorous compliance expectations of R&D tax regulators and underscores the importance of a methodical approach to documenting R&D activities.
The Administrative Appeals Tribunal’s (AAT) decision in December 2023 emphasized that the activities claimed by Active Sports Management (ASM) did not constitute eligible R&D activities under the Industry Research and Development Act 1986.
Specifically, the Tribunal found that the development of a custom basketball shoe failed to exhibit a systematic progression of work grounded in established scientific principles, from hypothesis through to experiment, observation, evaluation, and logical conclusions.
The Tribunal scrutinized ASM’s claims related to the development of the “Delly1” basketball shoe, designed to meet the specific needs of NBA player Matthew Dellavedova.
Despite producing multiple prototypes, the process described by ASM did not meet the criteria for core R&D activities due to a lack of systematic experimentation and documentation.
The Tribunal highlighted the importance of clearly documenting each stage of the R&D process, from hypothesis formulation to the testing and evaluation of results.
This decision signals a clear message to entities seeking to benefit from R&D tax incentives: a rigorous, well-documented approach to R&D activities is essential.
The Tribunal’s emphasis on contemporaneous written evidence as highly persuasive underlines the need for entities to meticulously record their R&D processes, ensuring that activities are carried out in a manner consistent with established scientific principles.
In light of the AAT’s decision, companies engaging in R&D activities are advised to:
The case also references the 2020 Federal Court decision of Commissioner of Taxation v Bogiatto, where it was acknowledged that while written evidence is ideal, other forms of evidence, such as witness statements or oral testimony, can substantiate R&D claims.
However, contemporaneous written documentation remains the recommended form of evidence to support R&D activities and claims.
The Active Sports Management case serves as a critical reminder of the importance of adherence to R&D tax incentive rules and the need for comprehensive documentation of R&D activities.
By adopting best practices for governance and documentation, companies can better navigate the complexities of R&D tax compliance and maximize their potential benefits under the program.
As the legal landscape evolves, staying informed and proactive in documenting R&D efforts will be key to achieving successful outcomes in tax incentive applications.
If you have any queries about the Active Sports Management R&D Decision, or Australian tax matters in general, then please get in touch
Research and development (R&D) tax relief is a solution available in the Polish tax system that aims to stimulate innovation and reward taxpayers investing in R&D activities.
In this article, we will explain what R&D tax relief is, who can use it, on what terms, and what the possible benefits are.
The fundamental condition for including R&D tax relief is conducting research and development activity, which refers to a set of actions undertaken to increase the state of knowledge and the development of a particular domain.
According to the statutory definition, it shall be creative, involve research or development work, be systematically undertaken, and be undertaken to increase resources of knowledge and use them to apply in a new way.
R&D tax relief is available for entrepreneurs who conduct R&D activity and settle their taxes according to tax scale, flat tax, or corporate income tax.
The size of the company is not important, as both micro-companies and huge corporations can benefit from it.
Eligible costs are expenditures incurred as part of R&D activities carried out for the purpose of research development. These include, but are not limited to:
The R&D tax relief allows for deducting a sum that cannot exceed 100% or 150% of eligible costs, depending on the taxpayer’s status.
The amount of the eligible costs cannot exceed a certain percentage, which varies depending on the taxpayer’s status.
To qualify for R&D tax relief, a taxpayer must meet several conditions, including
Yes, R&D tax relief may be settled up to five years back by submitting a correction of CIT/PIT declarations.
The procedure for settling R&D tax relief for past years consists of several steps, including collecting technical documentation and submitting a special application for ascertainment of overpayment to the Tax Office.
In summary, R&D tax relief is a beneficial and safe solution for all entrepreneurs who develop new products, processes, or services, regardless of the size of their business and industry.
It is one of the most attractive forms of business support for entrepreneurs, and it allows for deducting a certain percentage of eligible costs.
If you have any queries about this article on R&D tax relief in Poland, or Polish tax matters in general, then please get in touch
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
The UK’s R&D regime has been incredibly attractive for many years.
Further, HMRC has consistently taken a ‘light touch’ approach to its supervision of the regime.
However, it has been clear for a number of years that there is a core of ‘specialist’ companies that might have taken a somewhat bullish approach to some of their claims.
As such, for some time, there has been speculation over whether the regime is ripe for reform.
To an extent, we are now starting to see that reform reflected in the changes recently announced / confirmed at the recent fiscal events.
Further, over the weekend, we have seen the Treasury open a consultation on reforming the R&D regime. The proposal is that the current dual system of an SME and a RDEC regime is merged into one.
Change is certainly coming…
There will be material changes to the UK’s Research & Development Tax regime.
These will be introduced with effect from 1 April 2023.
The changes will impact:
It is stated that the measures will ensure that:
It is clear that the changes to the SME scheme are being introduced as a response to perceived error and abuse of the regime. It is a shame that some bad actors have resulted in a dialling back of the benefits for all SMEs.
In addition, the new consultation release suggests the government is eye-ing up a merged, unified regime.
The rate and form of relief depends on whether the company can claim under the SME regime or only under the R&D expenditure credit (“RDEC”) regime. Large companies can only claim under RDEC along with some SMEs who are outside of the SME regime.
Under the SME regime relief is available as follows:
As referred to above, this is targeted at larger companies. However, in certain circumstances, it might be an SMEs claiming RDEC.
The RDEC uses a different method of calculating corporation tax relief on R&D expenditure. This is sometimes referred to as an “above the line” credit claimed as a cash payment.
For expenditure incurred on or after 1 April 2023 the various rates will change. The old and new rates are as follows:
| Profile of taxpayer | Up to 31 March 2023 | From 1 April 2023 |
| RDEC Company | RDEC Credit: 13% Corporation tax (“CT”) rate: 19% Benefit: 10.5% | RDEC credit: 20% CT rate: 25% Benefit: 15% |
| SME (in profit) | Enhanced deduction: 130% Benefit: 24.7% | Enhanced deduction: 86% Benefit: 21.5% |
| SME (loss-making) | R&D credit: 14.5% Benefit: 33.4% | R&D credit: 10% Benefit 18.6% |
In addition to the above, the Government is also introducing territorial restrictions to the regime.
These rules will apply to subcontracted R&D expenditure along with payments for externally provided workers (“EPWs”).
Subcontracted R&D activity will need to be performed in the UK.
EPWs will need to be subject to UK PAYE.
Expenditure in respect of overseas activity will still qualify in some limited circumstances.
In better news, expenditure on the cost of data licences and cloud computing will now constitute qualifying expenditure.
Companies will be subject to a new online pre-notification requirement where:
The new procedure means that the company must inform HMRC of:
within six months of the end of the relevant accounting period (unless the full claim has been submitted within the six-month deadline.) Previously, the only deadline has been the two year (following the end of the relevant accounting period) deadline for making a claim.
As stated above, these changes are also now joined by the announcement over the weekend of a new Government consultation on a new, unified R&D regime.
In a previous consultation, had asked views around whether the two schemes should be merged into one. This new consultation develops that idea further.
It appears that the government is coalescing around an ‘above the line’ credit for all parties. In other words, the SME regime will be replaced by a regime that looks more like RDEC for all.
The consultation document also alludes that additional relief might be available to either “R&D intensive companies” and / or “different types of R&D”. In the case of the latter, it might be that relief is targeted at activity with a “social value”.
Following on from any consultation, the new unified regime will be announced at a future fiscal event and implemented, as things stand, for expenditure incurred from 1 April 2024.
The reduction in the rate for SMES is disappointing. This is particularly the case for start-ups for which the ability to claim the repayable tax credit can be an important source of cash.
On the other hand, the increase in the RDEC is to be welcomed and should make the UK’s scheme more competitive internationally.
It is good to see that the categories of qualifying expenditure will be expanded to include data and cloud computing.
The changes in the process for making an R&D claim will be particularly relevant for companies who have not made a claim in the past. They will need to get their affairs in order much more quickly bearing in mind the new six-month deadline.
Finally, the enthusiasm for a unified system is perhaps not wholly unexpected either. The UK is perhaps unusual in offering a dual system.
It is hoped that the Government and all stakeholders can bash into shape a unified system t that preserves the attractive benefits for those currently utilising SME relief and RDEC but manages to ensure that relief is properly targeted and abuse minimised.
Watch this space.
If you have any queries relating to the Research & Development Tax Changes in the UK or tax matters in the UK more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
The Irish Finance Bill 2022 provides for changes to:
Both changes are to reflect the OECD’s Pillar Two model rules and the EU’s draft Pillar Two Directive.
Ireland has an attractive R&D tax credit for qualifying expenditure on R&D activities. This includes certain expenditure on plant and machinery and buildings.
The credit is currently 25% of the allowable expenditure.
The mechanics of the regime are that the tax credit can be offset against the claiming company’s current and prior year corporation tax liability. In addition, any excess credit may be:
The OECD Pillar Two model rules and the EU draft Pillar Two Directive introduce the concept of a “qualified refundable tax credit” (QRTC).
Going forward, the R&D tax credit regime in Ireland will need to be consistent with QRTC requirements.
In order to qualify as a QRTC require, the tax credit to be paid as cash (or available as cash equivalents) within four years of the date on which the taxpayer is first entitled to it.
A tax credit that qualifies as a QRTC will be treated as income and not as a reduction in taxes paid. This is important when it comes to calculating the relevant effective rate of tax rate for the purposes of the global minimum corporate tax rate.
The Finance Bill proposals seek to revise the R&D tax credit so that it is consistent with the QRTC criteria. This will include providing that the credit is fully payable in cash or cash equivalents.
The new proposals under the Finance Bill measures provide that the first instalment of the R&D tax credit should be equal to the greater of:
The cap on payable credits linked to the corporation tax/payroll tax payments will no longer apply.
A consequence of the change is that companies that could have obtained the full value of the credit in a current year versus their corporation tax liabilities, will now instead see that benefit spread over three years.
In addition, to ensure alignment with the Pillar Two rules, the R&D credit should be paid within the four-year period. This includes where there is an open investigation by the tax authority.
The Finance Bill also provides for Pillar Two related changes to Ireland’s KDB.
The KDB is a form of patent box regime and provides for a 50% reduction of qualifying income. This results in an effective tax rate of 6.25% for the taxpayer in respect of the qualifying income.
However, the requirements are relatively strict and it is understood that uptake has been limited
The Finance Bill measures provide that the KDB trading expense deduction is reduced from 50% to 20% of qualifying income. This results in a new effective rate of 10% as opposed to the existing 6.25% on qualifying income.
If you have any queries about the Irish Finance Bill 2022, or Irish tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article