Patent box: Why tax professionals need to be part of R&D decisions

November 02, 2015

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Patent box can be an extremely valuable incentive for companies that are able to claim. As we explained in our previous blog, this means that it’s essential that eligible companies get organised as critical deadlines are fast approaching. But the incentives offered by patent box raise another important point, and that’s whether companies that are likely to benefit are factoring in tax and other funding into their R&D decisions.

The typical tax rate across larger EU countries is around 30% – the UK rate will be 18% by 2020, but when patent box and R&D credits are taken into account, the effective tax rate could be closer to 8% or less. This tax saving should be a significant factor in the decision over where qualifying R&D should be located, particularly when a group already has infrastructure in place in the UK that would support R&D investment.

Here’s an example, in which I won’t go through the detailed calculations:

A multinational manufacturing company is considering investing in developing a new innovation. It sets up a new company, let’s call it Newco, and spends £50m building and fitting out a factory to house the product development and commercial production.

Newco will purchase existing IP at a cost of £25m. The R&D costs over the next five years, mainly in the form of salaries, will be £10m a year. Turnover is £500m over the 5 year period, with a 20% margin (EBITDA, or earnings before interest, taxes, depreciation and amortisation).

Using these basic numbers and a few assumptions, the company’s tax charge is £8m on £100m EBITDA, against which it offsets £5m of gross R&D expenditure credit, paying £3m cash tax. Goodwill amortisation and patent box each save around £5m, and the net 8% R&D expenditure credit is worth £4m (after tax).

If the investment had been in another EU country with, let’s say, a 30% tax rate and no innovation incentives, the tax cost could have been £30m, leaving £27m less to reinvest into R&D. And that’s before factoring in any discretionary national and EU grant funding.

Tax isn’t always part of the consideration when companies assess where their R&D activities should be located – but it should be. It’s time to make sure that tax specialists are involved in what, until now, has been a purely operational decision. Tax teams need to make sure that their knowledge of patent box and other innovation incentives is shared, and factored into the equation.

 

Angela Browning | Patent Box

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