The basic scheme works by enhancing the tax relief available for research and development by an extra seventy five percent. This gives an extra tax deduction to technology companies which in many cases is often unclaimed. Furthermore where a company is not a tax payer it is able to surrender the loss for a tax refund of twenty four and a half percent of the expenditure in many cases.

The revenue guidance on the definition for research and development is rather long and descriptive. In essence it comes down to technical or scientific uncertainty that needs to be overcome. This applies to all areas of technology including software.

The process stems from the companies annual accounts and routine corporation tax affairs. The accounts need to be reviewed in order to isolate that expenditure which qualifies for the extra deduction. Most of the costs which are involved in a project would generally qualify. This includes materials, salary costs, subcontracted research and development, externally provided workers, heat and light and software costs. These costs would then be summarised and forwarded to HM Revenue & Customs together with a reasonable amount of evidence concerning the work undertaken. In most cases the revenue would aim to respond in thirty days. Often this would involve payment of the refund. In some cases there might be routine enquiries. These are normally cleared up quickly with refunds following shortly thereafter.

Over the years the schemes rules have been improved so that more companies can benefit. Recently, despite the rumour that the scheme would be a victim of the government cutbacks it’s continuance has been confirmed. Additionally proposals are in place not only to widen it’s scope but for the refunds to be further increased. In the near future it is felt that any small or medium sized company carrying out research and development no matter how small would benefit from making a claim. Some of the changes have not had the publicity that they deserve. Companies need to start thinking of this issue now so that their claims can be maximised in future.

The new patent box regime starting in 2013 will be a further boost to technology companies in the UK. Companies carrying out research and development are in a position to benefit from valuable tax breaks not available to others. It is important that these companies take advantage of the help that is available to them by using a professional accountant used to dealing with clients in the technology sector.

The key points of the proposed patent box regime are as follows:

• Application of a 10% corporation tax rate on income from patents beginning on 1 April 2013.

• The regime will apply not only to royalties and licence fees for the use of a patented invention but also “embedded income” in profits from manufacturing.  The regime will also apply to the sale of patents in the patent box.

• The 10% corporation tax rate will apply to super profits created by the patent over and above the profit from routine business profits.  The calculation proposed involves a three stage process and would at first glance appear complicated.  Companies are free to opt out of the scheme but it is hoped that clear guidance from Revenue & Customs will help the situation.  Edwards intend to develop expertise in this area so that companies will benefit where possible.

• Qualifying patents will be those granted by the UK Patent Office or the European Patent Office only.

• The regime will apply to qualifying income earned worldwide by a UK company from an eligible patent.

• The Patent Box rate would not apply to income between application and grant of the patent at the time it arises.  Once the patent has been granted, the company can claim the benefit of the rate for that income (up to four years).

• The regime only applies to ownership of patents.  It has not been extended to other forms of IP (other than certain other limited forms of IP such as regulatory data protection, plant variety rights and supplementary protection certificates).

• Outright ownership of a patent will not be required.  The patent box will be available to UK companies with an exclusive licence where there is effective market exclusivity.

• The original consultation suggested that all patents commercialised after 29 November 2010 would qualify.  After representation it is now proposed that the patent box will apply to all patents, but the benefits being phased in over a five year period.