Business innovation usually requires significant investment so you’d think companies would do everything possible to capitalise on the potential returns.
Confusingly, this is often not the case.
While innovation usually brings value to a business longer term in the form of new improved products, services or processes, there are key steps every business should take to ensure they fully benefit from the work – and reap more immediate rewards.
R&D tax relief
It may be years before the results of the innovation come to fruition but companies can still profit in the short term through tax relief designed to reward research and development (R&D).
R&D tax relief was introduced by HMRC in 2000 with the aim of incentivising innovation among UK firms. Two decades later, our research suggests that well over half of companies that are potentially eligible for R&D tax relief have never made a claim.
With the average R&D tax relief claim worth £54,000 per year – a sum that would make a big difference to most companies’ annual accounts – this means UK SMEs are missing out billions in unclaimed R&D tax relief.
This is largely due to business leaders not knowing their company is eligible for R&D tax relief, as there is a widely held misconception that R&D applies only to scientists.
HMRC was careful to define R&D in such a way it could apply to varied work across multiple industries – the idea was to turbocharge innovation across every sector.
It can apply to any project or work seeking to resolve a scientific or technological uncertainty. It can take the form of a new process, product or service or be an improvement to an existing one. Crucially, the R&D work does not have to have been successful to qualify.
Examples of qualifying R&D work might be a restaurant business creating a new seasonal menu or a construction company using new more sustainable building materials.
With this in mind, accountants have a key role in educating business clients about the potential gains of R&D tax relief and where necessary, encouraging them to seek out the advice of an experienced tax relief consultant who can accurately advise on what work may qualify.
Protect your Intellectual Property
Intellectual property (IP) is the most valuable asset for most businesses. It is dictates a company’s unique offering and identity, setting it apart from rivals.
It is therefore vital that IP is protected at the earliest possible stage. IP left unprotected can completely undermine a company and devalue years of work. We repeatedly see IPRs undervalued in company accounts, having been mismanaged or overlooked.
Companies also need to ensure they have a full understanding of their intellectual property rights (IPRs) so they can manage and exploit them.
Different forms of IP require different protection with some benefitting from automatic rights — copyright, trade secrets — while others need to be applied for, such as trademarks, patents and registered designs.
Whatever form the IP comes in, it is the responsibility of the business to protect and then monitor infringements to ensure the protection retains its value. Companies can exploit protected IP through licence agreements, meaning licence fees and royalty payments or even a sale.
The Patent Box tax relief
Another powerful reason to protect IP via patents is so businesses can benefit from the Patent Box tax relief.
This form of tax relief, which was phased in from 2013, offers a reduced rate of corporation tax of just 10 per cent on profits made from patents. This represents a near halving of the rate of corporation tax payable on IP related income, so can make a huge difference to a business’s balance sheet.
Yet more than half of UK companies (54%) do not know the Patent Box tax relief is available to them, which explains why there is still such a low take up.
More than 5,600 patents, on average, were granted each year between 2012 and 2017, according to government figures, while Patent Box claims over this period have never gone above 1,160 a year, still totalling £754.3 million.
This can only mean that there are thousands of innovative companies failing to cash in on their patents through this tax relief and missing out on millions of pounds.
If a company has registered patents, it should look at how much income they bring in, which may require the help of a specialist in this area. The Patent Box can apply to sales related to or stemming from the patents in a multitude of ways so a good understanding of the rules is needed to ensure nothing is missed.
Every business should regularly carry out a full IP audit to review all the company’s R&D activity with focus on whether anything could be patented in order to benefit more from the Patent Box.
If a company makes sure it is claiming R&D tax credit for initial work to develop innovative products and services, then protects and capitalises on the resulting IP through licenses, sales and the Patent Box tax relief, it should see a major boost to its income which can be reinvested to fuel further innovation and growth.
Mark Tighe is founder and managing director at specialist tax consultancy Catax