Can the UK be a more innovative place to manufacture in?

We waited with bated breath on 29 November to see what rabbits the Chancellor could pull from his hat to try and give a confidence boost to the economy.

Whether or not he has managed to successfully boost manufacturers’ confidence, only time will tell. He has at least acknowledged that innovation must play a significant role in the country’s future. The autumn statement led into draft legislation released on 6 December on the adoption of a Patent Box tax regime and on revisions to Research & Development (R&D).

The Patent Box for corporate tax payers has been on the political agenda for some time, and the draft legislation now gives businesses a clearer picture of how it will operate.

The key features of the proposed tax regime are:
• it will apply from 1 April 2013;
• a reduced rate of corporation tax of 10% on profits attributable to qualifying intellectual property (IP);
• it will apply to patents issued by the UK and EU patent offices, but also to patents issued by other European states with similar criteria;
• it will apply to both existing and new IP;
• a relatively complicated formula will be applied to calculate the profits attributable to the lower 10% corporate tax rate;
• however, for company’s with taxable profits of less than £1 million a simplified system will apply whereby 75% of the attributable profits will be taxed at the 10% rate, and no requirement for the more complex formulaic approach would be required;
• losses generated from the exploitation of the patent box regime will be offset against patent box profits in other group companies, if appropriate, or carried forward against future patent box profits.

The R&D tax regime has also been under consultation for some time. The proposed changes are, in particular, aimed at improving the system for SME tax payers.

The key amendments to the R&D system for SME’s are:
• the additional deduction of 100% of qualifying expenditure will increase to 125% of qualifying expenditure (i.e. spend £100 and get tax relief of £225), on expenditure incurred from 1 April 2012;
• restriction of the R&D payable credit to 11% of expenditure;
• abolition of the Vaccine Research relief
• removal of the restriction of any payable R&D credit being limited to the company’s PAYE/NIC liabilities;
• clarification of the ‘going concern’ definition from the existing legislation, to now exclude companies in administration.
For both SME’s and large companies:
• the minimum spend level of £10,000 will be removed;
• relaxation of the rules for payments made to businesses that provide staff to R&D companies.

The Economic Impact assessments issued with the draft legislation show that the government anticipate that the Patent Box and R&D regimes will contribute to increasing the innovative contribution to the UK economy, and make the UK a more attractive place for the full spectrum of manufacturers as well as inward investment.

A step in the right direction has been taken to keep the UK competitive, but further steps may be required in the future.

The government understands that manufacturers are critical to the growth of UK plc and with these changes in the tax system adding an extra boost for SMEs, now is the time to ensure you get the right advice for your manufacturing business.

To find out more about these changes and how they will affect your business, contact Daniel Martine, Partner at Kingston Smith on 01708 759759, or dmartine@ks.co.uk.

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