Patent Box Special - A clever way to reduce your tax burden – in association with Hazlewoods
HMRC offers a generous tax reduction for those companies which invest in patents, but they don’t make it easy.
We review the Patent Box in a special feature inside our November issue of Business & Innovation Magazine.
Successful companies recognise the importance of research and development in securing future growth and profitability. That’s why the government offers R&D tax credits to businesses which are investing in innovative science and technology.
The more successful the project is, the greater the possibility that the company will succeed and potentially pay more tax, benefiting us all.
But imagine being able to legitimately pay less corporation tax because you have been able to obtain patents on that research and development after all the hard work has been done?
Too good to be true? No – although HMRC doesn’t make much effort to publicise it.
The government introduced Patent Box in April 2013 to reward the active exploitation of patented technology in the UK.
It aims to encourage companies to retain and commercialise intellectual property in the UK by allowing them to apply a lower rate of corporation tax to profits earned from their patented inventions.
By electing to use Patent Box, a company may effectively receive a 10 per cent tax rate, reduced from the current headline corporation tax rate of 19 per cent, on profits made from its patented inventions.
In principle, this tax reduction could easily “repay” many times over the cost of obtaining a UK patent and potentially generate a substantial cash injection to a business.
To be eligible for the effective corporation tax rate of 10 per cent, income will need to come from at least one of the following:
- The sale of patented products, or of products incorporating a patented invention
- The sale of spare parts designed for products containing the patented item (even if the spare itself is not patented)
- The licensing of patent rights
- The sale of patent rights
- Infringement income
- Damages, insurance, or other compensation related to patent rights
- A company can also benefit from the Patent Box if it uses a manufacturing process that is patented or provides a service using a patented tool.
Investment in R&D is seen as priority by government and business
Last March the government announced its largest ever research and development budget, worth £39.8 billion, allocated across the Department for Business, Energy and Industrial Strategy’s partner organisations.
It sounds a lot, but when you consider that these partner organisations include the UK’s Research and Innovation Agency, UK Space Agency, the Atomic Energy Authority, National Academies and the Met Office to name a few, and the huge costs incurred in research and development, perhaps it’s not as generous as it might appear.
However, it does show a welcome increased level of commitment from the government, which wants the UK to be a science superpower.
The Spending Review committed record levels of investment over the next three years, with investment in research and development set to increase by £5 billion to £20 billion per annum by 2024-2025 – a 33 per cent increase in spending.
CASE STUDY: Powering Patent Box for TBS Engineering
Founded in 1968, TBS Engineering is a world-leader in producing automatic machinery for the lead acid battery industry.
It develops and supplies machines to original equipment and replacement battery manufacturers that go on to produce millions of batteries that power the world’s biggest names in automotive engineering.
The Gloucester based company now has one of the most experienced teams in the sector with more than 200 employees working around the world.
Over the years it has expanded and in 2014 alone invested more than £1 million in research and development to pioneer new technologies and support customers with class-leading battery assembly equipment. It continues to this day to invest heavily in its R&D programme.
When Patent Box was first introduced, Hazlewoods explained the intricacies of the legislation to TBS and how this could apply to the company’s assembly line sales. Due to the complexities involved, Hazlewoods arranged a meeting with HM Revenue and Customs at the company’s premises to discuss and agree its conclusions.
Jon Curtis, Group Finance Director of TBS Engineering Limited, said: “Hazlewoods made a complicated claim process relatively straightforward for us. “After initial discussions to understand how the patented items incorporated into our products, Hazlewoods Corporate Tax partner David Clift, along with Jemma Vaughan liaised directly with HMRC on our behalf to ensure that all relevant income was fully captured.
“The services provided to us in respect of R&D and Patent Box reliefs has been invaluable.”
CASE STUDY: Green light for The Traffic Group
The Traffic Group, based in Cheltenham, specialises in traffic technology.
With a strong focus on engineering excellence, the group has achieved three Queen’s Awards for Innovation in the last 12 years.
The Traffic Group invests extensively in new product development and advanced production test facilities to ensure high standards of quality, reliability, and regulatory compliance.
The group has a strong customer base within the UK and overseas, including major systems integrators, Highways England, local authorities, utilities, and many leading traffic management companies. It also has an extensive distributor network.
The companies within the group include AGD Systems, one of the UK’s leading manufacturers of intelligence transport systems products to help create safer and more efficient traffic and transport environments, and MAV Systems which develops Automatic Number Plate Recognition technology.
The group employs more than 100 staff across six sites in the UK and Australia.
The Traffic Group’s investment in research and development ensures that its product range incorporates the newest technology, and it patents this technology where possible.
Over the last few years, the group has acquired several businesses, with Hazlewoods providing reorganisation advice to assist in preserving or improving the R&D and Patent Box tax savings.
Pete Hutchinson, Director of The Traffic Group Limited, said: “Hazlewoods has been instrumental in helping the group identify R&D and Patent Box tax relief opportunities.
It is also reassuring to know that Jemma is just a call or email away to give pro-active advice when we are planning to make any commercial decisions which may affect the financial position of the group.”
CASE STUDY: Stroud software company reinvests in R&D thanks to Patent Box success
Cristie Software helps companies across the world recover and replicate critical systems.
The software marketed by the Stroud-based company was originally embedded into tape drives. The current owner saw the value in this software as standalone recovery software adding niche functionality to the data protection market. The software business demerged from the wider group and established global relationships with companies such as IBM and Dell which now market it globally.
This software has expanded over the years and is now used within Cristie for its recovery, migration and replication software.
Typically, a new feature within an existing product could take up to nine months in research and development, then into proof of concept and further development before releasing to the market.
This is elapsed time which includes a number of resources. If this was a new idea for which the company carried out research, development, prototype, patent and then included within a product it could be three to nine months of the initial R&D prior to speaking with a patent attorney which can then take a further three to six months prior to filing the patent. Once filed, the patent can take years before it’s awarded, with the investment easily running into more than £100,000 for a patent to be awarded.
Although Cristie has had unique IP for years with first-to-market technology, the company actually obtained its first patent as part of an acquisition and has gone on to submit three further patents.
The process for gaining a patent on software is complex, time-consuming and expensive. A company must prove it has a unique and novel idea that is able to solve a problem which cannot be otherwise solved.
It’s also important that any information available in the public domain or shared outside cannot be patented so the business can’t discuss the solutions with customers or anyone external to understand if the idea will work, it must be achieved through lab-based R&D.
The company was aware of Patent Box and asked Hazlewoods to provide guidance on what information was required, but it still took a lot of effort to identify exactly what could be claimed and what is not allowable.
Patent box relief has also recently become significantly more complex, and the company has relied on Hazlewoods to assist in the complex calculations.
But the outcome has made all the work worthwhile, and thanks to being eligible,
Cristie has been able to invest and expand its R&D efforts with dedicated staff ‑ focused on researching whether future ideas are patentable.
Ian Cameron, CEO at Cristie Software, said: “There are significant resources involved in software development. A lot of ideas, code and prototypes end up not being patented or used within our software, either because they don’t solve the intended problem or we find better ways to solve the problem during the R&D. People see and hear about the patent, but often not the R&D investments that don’t lead to patents.”
CASE STUDY: Best foot forward for Milspeed as patent box enables further product investment
Milspeed, based at Bourton-on-the-Water in Gloucestershire, develops and produces extruded thermoplastic footwear reinforcement materials called box toes and counters designed to reinforce and keep the shape of the shoe.
These are made in the UK and exported to factories that supply the world’s largest shoe brands. Its patent covers the reprocessing of tri-laminate waste plastic materials and turning the waste into new shoe stiffening product.
The difficulty lies in successfully reprocessing the tri-laminate material when each layer of laminate has varying different melting points.
To tackle this, Milspeed successfully developed a range of footwear products based on taking back shoe factory waste and reprocessing it, resulting in zero waste materials and minimal carbon cost.
Developing the right reprocessing methods must be achieved while maintaining the highest performance properties of a tri-laminate material made up of layers of adhesive, thermoplastic resilient film and nonwoven lining.
Cutting of components for shoes will always lead to waste but Milspeed can now reprocess this waste back into the original product. This has resulted in avoiding landfill and reducing the virgin raw materials used.
It has been an economic and ecological success as well as providing the company with a competitive edge.
In addition to granting the patent for this process, the development resulted in Milspeed being awarded The Queen's
Award for Enterprise for International Trade and consecutive annual awards for ‘Best in Class For Sustainable Innovation’ from one of the world’s top sports footwear brands.
Milspeed was founded in 1987 by Ian Milhench, CEO and David Speed, who retired some years ago. The business now employs 55 people with two manufacturing sites in the UK, in Bourton-on-the-Water and Banbury, another in Vietnam with further sales offices in China, Indonesia, India and South Africa.
Developing a new product or process takes time and investment, from the laboratory through to prototype creation, customer testing and acceptance.
Milspeed first became aware of Patent Box (and R&D Tax Relief) through an industry contact.
Ian explained: “Initially, we worked with an external specialist company and then transferred our support for Patent Box and R&D relief to Hazlewoods when they became our auditors.”
Patent Box has enabled Milspeed to invest even further in its research and development.
Ian added: “Our customers require more cost effective, environmentally friendly and higher performance products across different thicknesses and compositions to meet the demands of new shoe designs.
Our component development is targeted at researching and creating new products as well as reducing costs through new raw materials and combinations of recycled ingredients, using different types of waste available on the global plastic waste market.
“The lower rate of corporation tax on profits earned from our patented inventions provides incentive to continue developing new products and processes. We have developed more products, for which we currently have two further patents under consideration using reprocessed and other difficult to recycle waste.
“Patent Box has also encouraged Milspeed’s investment in new manufacturing machinery and people for the process. In recent years, we have acquired new recycling, shredding, washing and drying equipment to support the product made under the company’s patent.
“Ultimately, this is important because our customers like to see us investing in research and development.”
CASE STUDY: Drilling down into the detail for Auger Torque Europe Limited
Established in 1998, Auger Torque Europe develops and produces hydraulic attachments for the construction and agricultural industry.
And its market is growing. With governments across the world investing in infrastructure to help dig themselves out of the economic downturn, there are lucrative new opportunities for companies in this sector. The continuing demand for transportation and infrastructure is constantly driving product development and service. As a result, the company is continuously expanding its product range.
Auger Torque works with customers, operators and machine manufacturers to research, develop, manufacture and bring to market innovative earthmoving products. As part of the German Kinshofer Group since 2015, it has manufacturing bases worldwide and services customers in more than 70 countries.
Since 2013 Hazlewoods has worked closely with Auger Torque to understand the composition of the company’s sales and the nature of the patented technology, to assist the company in identifying the relevant income and profits for Patent Box purposes.
More recently, Hazlewoods has supported the company’s transition to new Patent Box rules.
Mike Cartwright, Chief Financial Officer at Auger Torque Europe, said: “Hazlewoods has been a great support to Auger Torque. They have taken the time to understand our business and the products that we sell and used this knowledge to submit successful R&D and Patent Box tax relief claims to HMRC.”
For further information on Patent Box please contact Jemma Vaughan, Director at Hazlewoods, on 01242 680000 or email [email protected]
www.hazlewoods.co.uk
Twitter: @Hazlewoods
LinkedIn: @Hazlewoods
