Statistics: make of them what you will - UK patent box vs R&D reliefs

The UK tax authority has recently released statistics for take up of the patent box in 2013-14 (the first year of the relief); on the same day, it released the latest statistics on use of the UK’s R&D tax reliefs for the same tax year. The reports make for some interesting compare and contrast points:

Total claims in 2013-14
- patent box: 700
- R&D tax reliefs: 22,415

Total value of claims in 2013-14
- patent box: £342.9m
- R&D reliefs: £2.45bn

SME claims in 2013-14
- patent box: 475 (68%)
- R&D reliefs: 19,990 (95%)

Value of SME claims in 2013-14
- patent box: £15.7m (5%)
- R&D reliefs: £1.165bn (48%)

The largest claimant sector (for both patent box and R&D) is, unsurprisingly, manufacturing (63% of patent box claims; 30% of R&D claims). The second largest for R&D is Professional, Scientific & Technical, with about 20% of claims - but this sector only made 6.3% of patent box claims. This might relate to the nature of the patent box, and particularly the extra hurdle for claiming on services income. The other sectors are somewhat more difficult to analyse as numbers of patent box claims are so low that sectors have been combined to prevent commercial information being disclosed.

The R&D relief requires a company to be undertaking a project which seeks an advance in the global state of knowledge in an area of science or technology, it would seem logical that a successful R&D-relief qualifying project would often lead to something capable of being patented – and, in the 14 years for which we have R&D statistics, 141,000 claims for relief have been made. Fair enough, R&D relief claims can be made for unsuccessful projects, but out of 141,000 R&D relief claims, it seems pretty likely that there are more than 700 companies within the scope of the patent box … the report doesn’t speculate upon why the take up is so low in terms of numbers (and for comparison, the impact note when the patent box was introduced estimated the first year cost to the Treasury at £500m).

Big budget movies in the UK: good news for tax payers

Not much core expenditure
here, one suspects 

Late last month, on 29 October to be precise, the Finance Act 2014, Section 32 (Film Tax Relief) (Appointed Day) Order 2014 (SI 2014/ 2880) was made. This unattractively-titled provision at least had some attractive content: its effect is to increase the amount of relief available for films if they have incurred a core expenditure exceeding £20 million from 1 April 2014. Core expenditure does not mean expenditure on the naughty bits of the film that seem to be mandatory these days and which make the audience go "Cor!" when they view them.

 According to the Order's Explanatory Note:

This Order appoints 1st April 2014 as the day specified for the purposes of section 32(4) of the Finance Act 2014. Authority for this retrospective effect is given by section 32(6) of that Act. The amendments made by section 32 to the Finance Act 2014 ensure that film tax relief will be available for surrenderable losses at a rate of 25 per cent up to the first £20 million of each production’s UK core production expenditure (to a maximum of 80 per cent of UK core production expenditure) and 20 per cent thereafter (to a maximum of 80 per cent of the UK core production expenditure), for all film productions where the principal photography was not completed before the appointed day – 1st April 2014. Previously the rate of 25 per cent only applied to limited budget films i.e. those with UK core production expenditure up to £20 million.

The minimum UK spending requirement will also change from 25 per cent to 10 per cent for film productions where the principal photography was not completed before 1st April 2014.

Cor!

International: Malta announces tax exemption for patent royalties

The Maltese Government approved a number of changes to their tax laws on 16th April 2010 – of particular interest on IP is the news that, with immediate effect, royalty and similar income derived from qualifying patents in respect of inventions will be exempt from Malta income tax (subject to conditions still to be announced, including a cap on the maximum amount that may be exempted – and the EU may well have some comments on the matter).

Malta has been reasonably tax-efficient for IP income, but this will put the country on a par with Ireland for patents, depending on the level of the cap. Under EU pressure, Ireland extended its exemption on patent royalty income to include royalties received in respect of non-Irish patents granted after 1 January 2008. A similar cut-off date for the Maltese exemption would seem to be likely, if only to appease the EU.

IP & the Chancellor

The UK Pre-Budget Report today had a couple of IP moments - overall potentially useful, but really just not trying hard enough.

10% tax on patent royalties

Good news? Well, yes: but only if you're planning on receiving income from 'innovative industries' (broadly, it's only going to be available for pharmaceutical and biotech patents). This is very much less generous than the similar royalty taxes in the Netherlands, Luxembourg and Belgium - all of which equate to a tax rate of around 6% and are available for a much wider range of IP.

So, good news for smaller business doing research that will lead to pharma/biotech patents - although 10% is higher than the Benelux options, the costs of successfully operating a non-UK company and keeping its profits out of the claws of the UK Revenue could be more than the 4% difference in rates for a small business.

The sting in the tail (because there had to be one): this doesn't come into effect until April 2013, and will only apply to patents granted after that date [Edited to add following comment - the date from which patents will be included isn't clear: April 2013 is the backstop date, it might be earlier. Lobby to make sure it is!]. There is advance publicity, and then there are Budget announcements. Trying to be more positive, there is some time to work on the government (any government!) to expand the scope of this proposal.

R&D relief: ownership requirement removed

Of more general use is the change (effective today) in requirements for small and medium-sized company R&D relief: there is no longer any requirement that the company owns the IP resulting from the R&D. Although HMRC could be flexible on this (eg: for university spin-outs with licences) they have also been very unhelpful in some cases.