SMEs could miss out on £1bn Patent Box tax relief

Green packagingIn the same way that £ms are potentially being lost on R&D tax credit claims across the north west, it also appears from my discussions with companies that too few businesses are aware of the forthcoming Patent Box company tax relief.

Admittedly, the Patent Box is a brand new tax incentive to be introduced with effect from 1 April 2013 but some companies will already be in financial accounting period ends that straddle this date so are effectively already potentially eligible.

The Patent Box will allow for worldwide income derived from qualifying registered patents to be subject to a reduced UK corporation tax rate of just 10%. This will result in a 50%+ reduction in the rate of corporation tax suffered – so a company with say £1m of taxable profits of which 50% is derived from patents could save over £30,000 in tax per year!

The scope of the Patent Box is also extremely wide in that a product need only physically incorporate a single patented invention for the income from the entire product to fall within the Patent Box.

HM Revenue & Customs have budgeted that this tax relief will be worth over £1bn to the UK economy yet many companies may unwittingly miss out on claiming their share if they are unaware of this new Patent Box tax incentive.

If you have either registered patents; patents pending or have simply held off registering any patents – now might be a good time to assess your eligibility for the Patent Box as there are a few hoops you need to jump through if you are to have a qualifying claim.

We can help you model the potential tax savings for your company and assist you in preparing your systems to maximise your Patent Box claim.

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Keep an ‘i’ on your IP

As our businesses evolve, we try new ideas, products and service lines.

Some ideas will fly whilst most will fizzle out.

For the handful of ideas that do become successful, it is important that we take adequate steps to protect any valuable underlying intellectual property that is generated.

This IP protection can take numerous forms from more formal processes including patents, trademarks and copyright to more straightforward internal planning such as ensuring that any intellectual property is identified including where, say in a company group structure, it resides?

For example, do you want your crown jewel intellectual property sat in the same company as your more risky trading activities…?

Might a separate intellectual property holding company be a better, safer option to ring-fence these valuable intangible assets from commercial risk?

At its most basic level – but often overlooked – is whether you have registered the relevant domain name for the new brand / product / service and whether you have incorporated the relevant (dormant) company name for protection?

Taking steps to protect your valuable intellectual property now will help both increase the underlying value of your business for a future sale and future-proof it against the evil plans of potential ‘idea-squatters’.

Similar posts:

How do I make an R&D tax credit claim?

10 need to know facts about the Patent Box

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5 Essential GMail Tips for Business

Image representing Gmail as depicted in CrunchBase

I struggle to find a better and more user-friendly email client than GMail.

I like its almost instant search capabilities and the ease with which you can link new domain email addresses. To make the most of GMail I recommend the following five fabulous (almost) free plug-ins:

1. Rapportive

Rapportive is an excellent email business tool that instantly provides you with the social media profiles of each person who sends you an email to your inbox. Their Twitter, Linkedin, Facebook and all other profiles appear in your sidebar alongside their email so you can instantly click to follow and connect with them.

2. WiseStamp

Looking for an email signature that not only lists your need-to-know contact details but also your social media profiles and latest feed updates? – this could be just the plug-in you need.

3. Boomerang

This is a fantastic tool that allows you to write emails now and schedule them for when you want them to be sent. It is intuitive in how it links to your calendar. Also brilliant in how it allows you to throw away messages into archive that you don’t need to action now but hurls them back at a time of your asking.

4. Awayfind (free trial)

Ever found yourself rushing around from meeting to meeting with no time to check email…..? And then you get to your next meeting or call and find you’re the only one there – if only, you’d checked your emails you would have found the cancellation email sent 20 mins before!

This is where Awayfind steps in. It allows you to specify individuals who may send you an email (your boss (both work and home!) or participants in your forthcoming meeting) and any emails that come from them are pushed to you say as text messages so you’re more likely to be notice them.

5. KeyRocket

Time is money – and the time you spend fumbling around with your mouse to switch from function to function within GMail is quickly reduced using KeyRocket. This nifty piece of free software sits quietly until it spots something you could have done far faster using a keyboard shortcut and then makes the suggestion for future reference in a box in the corner of the screen. Very neat.

 What are your essential GMail hacks and tips?

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North West SMEs claim an average £32,000 R&D tax relief

Salford Quays & BBC MediaCity UK - The Tram

Latest HM Revenue & Customs figures reveal that a total of £52m tax relief was claimed in the North West under the UK R&D tax credit scheme in 2010-11.

The £52m is spread over 985 claims giving an average claim of £53,000 (interestingly, this compares with an average claim of just £19,000 in London!), although this includes large company claims which can be significant. However, even when claims by large companies are split out North West SME companies claimed an average of £32,000 in tax relief.

This is good news for local North West companies and the number of claims made was 3rd highest overall after the South East (1) and London (2).

Overall, out of the almost 5 million SMEs in the UK only 8,140 R&D tax claims were made in 2010-11 and less than 1% of UK SMEs have made a claim for enhanced R&D tax relief since its introduction in 2000. I find this statistic staggering.

What should you do now?

  1. If you haven’t already reviewed your company activities to determine whether you have a potential R&D tax credit claim you should do this asap – there is a timelimit for backdating claims.
  2. If you have made R&D claims, compare your claims with the averages noted above and if your claim was for less than £32,000 consider whether it is worth getting a second opinion – you can amend claims if they are still within the two year timelimit.
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How much money should I take out of my business?

Williams [and] Young Britt (LOC)

A common question asked by business founders and entrepreneurs is how much of the profit generated (after paying all expenses) they should leave in the company – or put another way:

“How much should I pay myself?”

Here are two scenarios:

William pays himself enough to live off, pay the bills and take the family away for a well earned holiday abroad each year. The remainder he leaves in the company to strengthen its balance sheet and reinvest in new products, services and people as the opportunities arise (as well as protecting against a sudden unexpected ‘black swan‘ downturn in the market). William is mindful of the risk that carrying too much cash could interfere with the trading status of his company in the eyes of the tax authorities and this is kept under review by his trusted Wing-Man (his accountant).

Meanwhile, Harry strips the majority of the cash out of his business each year leaving some to protect against downturns. He works with his accountant Wing-Man to manage the tax efficient extraction of the profits to avoid any unnecessary tax leakage.

Which strategy is right?

It depends on the goals and aspirations of the founders plus the opportunity cost of either extracting or leaving the cash in the company.

As an entrepreneur you are both a wealth creator and an expert capital allocator. So you must have a plan as to the optimum way you can deploy and allocate the wealth you create for maximum future returns.

If you adopted William’s strategy and stripped most of the profits out you had better have a good plan as to how you are going to deploy that cash to get the best return on your capital. For example, are you going to invest in new ventures, back some promising entrepreneurs as a business angel (SEIS might be of interest?) or perhaps invest in property?

Leaving the cash on deposit in your current account is not a good strategy.

On the other hand, if right now you see plenty of opportunities to get a good return on your capital in the business then leave it in there and take some small bets on new products, services or other initiatives and build from there.

Back to the question and answer: it depends.

There is no definitive answer as it depends on a number of factors including:

  • your goals
  • where your business is up to in its lifecycle
  • what opportunities exist inside your business
  • what opportunities exist outside your business

Always good to discuss your personal strategy with a trusty Wing-Man….

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7 Traits of Successful Fast Growth companies

What is it that makes some businesses far more successful than others?

In the years I have worked with successful fast growth companies I have seen the following traits displayed by each of them

1. Think BIG

These highly successful fast growth companies may start out small but they think big from day one. This may be evident from their aggressive growth targets; their fearlessness in competing against companies 100 x bigger than them; or how they organise themselves internally with CEO, CFO, CMO etc titles.

2. Cover bands don’t change the world

Their mission is crystal clear. They know what they want to achieve even if they’re not exactly sure how they will make it happen – yet. To be another “me-too” business is not an option. The mission is sometimes disruptive in existing markets; sometimes a new slant on existing markets or other times striking out into completely new blue ocean markets. Having a clear mission that cascades throughout the organisation allows for decisions to be made quickly: “Does this move us closer to our mission / goal / objective – Yes or No?”

3. Give me a lever long enough and I’ll move the world

The business must be scalable if it is to continue on its growth trajectory without sacrificing the majority of its profit margin on more people, materials etc. Achieving scalability is different from business to business but every successful business has a plan for profitable scalable growth.

4. Clients’ interests are always put 1st

No matter what internal protocol says, if a client is unhappy they will go the extra mile to put it right. There is no navel gazing. They treat every client like it is their only client. I use the word ‘client’ rather than ‘customer’ deliberately – a customer may be viewed as transactional – a ‘one-off’ – whereas a client is a long-term relationship. These successful companies want clients.

5. No need for corporate values charts

Every member of the team is an embodiment of the culture of the organisation in the way in which they act every day. I am not sure if this stems from the fact that the founder(s) of the business are directly involved in the recruitment of new staff in the early stages and therefore recruit only those who understand and resonate with the mission of the business? Whichever, it works as you will often hear clients or suppliers reflect “Where did they find staff like that? They were so keen, so helpful, so eager to please – it was a pleasure working with them”.

6. Invest in many small bets

They know that if they are to grow and respond to changing market needs they will need to take risks and try new stuff. Trying new stuff costs time and money. Staking the future of the business on 1 new idea, product or service is folly – the walls can crumble in an instant if the project fails. So rather than sit tight and do nothing, these highly successful businesses try lots of little projects and test them with the market. If the feedback is positive (and cash is being received) then they can invest little by little into these little bets until they have a fully fledged new offering.

7. Dynamism is built into their DNA

It seems like there is a constant feedback loop going on in the business. Client-facing team members share successes and failures internally with lightening speed. Advances in technology allow these businesses to observe and listen to client needs. Tweaks to products and/or services are made on a daily basis. There is no standing still. Ever.

 

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10 need to know facts about the UK Patent Box

Patents are only for the old machine

You may already be successfully claiming R&D tax credits for your fast growth company. If so, you might be wondering what’s next in terms of tax incentives to assist your business once you have gone beyond the research and development phase and into the phase of commercial exploitation?

Up until now, there hasn’t been much….

However, we now have the latest UK tax incentive for intellectual property rich companies – the Patent Box, which kicks in from 1 April 2013.

The UK Patent Box is a £1bn+ tax incentive that represents potentially one of the most significant tax incentives ever introduced in the UK.

Here are 10 facts to get you started – plenty more detail to come in future posts:

  1. 10% corporation tax rate will apply to company income falling within the Patent Box – this more than slashes the corporation tax rate in half!
  2. Applies to qualifying patent derived profits generated from 1 April 2013 – 10% tax rate phased in over four years
  3. Companies must satisfy specific ownership requirements to one or more patents to fall within this regime
  4. Patents must be granted for the relief to apply. For patents pending, you can track the relevant income for six years and claim the tax relief upon grant
  5. Patent must be granted by certain designated patent offices to qualify: the UK Intellectual Property Office; the European Patent Office or other patent offices within certain designated EU countries
  6. Companies must take an active role in developing the invention to which the patent applies to qualify – passive ownership will not suffice.
  7. For groups, the company that holds the patent must carry out an active role to manage the IP
  8. Relevant patent profits are calculated by applying either an apportionment or streaming methodology – apportionment is the default calculation methodology
  9. Disappointingly the calculations are complex as you must run through a six stage process to reach the qualifying relevant patent profits –  but this is where we can help.
  10. You enter the patent box regime by election – it is not automatic.

Given that this relief kicks in from 1 April 2013, your company may already fall within this regime if your financial year end falls after this date e.g. those with an April, May or June  year end!

If you already have patents or are considering filing patents, you need to start planning now to maximise this opportunity. 

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Mix SEIS + R&D Tax Credits to Maximise your Start-up Funding

Taxes

Taxes (Photo credit: Tax Credits)

If you are looking at starting a new hi-tech venture then the timing has never been better in utilising the latest available UK tax incentives.

Consider a scenario where say 4 enterprising entrepreneurs are looking at building a new state of the art technology platform.

They budget it will cost c£1m to get to market but know they can prove the concept with c£100k-£150k.

But there’s a problem – cashflow is tight….

This is where a bit of forward tax planning can help.

Firstly, they could set up a new company to undertake the venture. They could then structure the shareholdings such that no shareholder and director has more than 30% of the shares and subscribe for shares under the Seed EIS Scheme (SEIS). The company would need to obtain certification that it is SEIS qualifying and it would be well advised to seek advance assurance from HMRC.

A company can raise £150,000 in total under SEIS so each of the four shareholders could subscribe £37,500 for 25% of the ordinary shares.

Under SEIS, each shareholder would be able to reclaim 50% income tax relief on their investment – so £18,750 income tax relief could be claimed by each shareholder amounting to a total £75,000 tax saving.

But there’s more….

The company could use the funds to engage in a qualifying SEIS trade of preparation for a trade by carrying out R&D activities. The R&D work could fall within the R&D tax credit regime which allows for a 125% uplift in qualifying spend for SMEs and capacity to claim a tax refund in situations where the company is loss-making – this will almost certainly be the case based on our facts as the company is pre-revenue.

So say the company invests the £150,000 into qualifying R&D in its first year then the company would be eligible to deduct a further £187,500 for tax purposes i.e. 125% * £150,000.

The company would suffer a tax loss of £337,500 and could either carry this loss forward to offset against future taxable profits or it could elect to surrender the tax loss in return for a tax refund. The refund is restricted to 11% of the enhanced R&D tax spend which equates to £37,125 cash back from HMRC.

Once the SEIS cash has been exhausted they can seek further funding under the less favourable (but still hugely attractive) Enterprise Investment Scheme (EIS). Further R&D tax credits should be available in later years too whilst the R&D activities continue.

So our new venture has succeeded in deploying £150,000 of funding and expenditure at a net cost to the founders of just £37,875. SEIS and R&D tax incentives have effectively provided the additional £112,125 cash funding!

This scenario does not take into account the possibility of some or all of the SEIS shareholders taking advantage of the one-off capital gains exemption on gains reinvested in the tax year to 5 April 2013 – we’ll leave this for another post as the tax savings are staggering!

Hopefully this illustrates that with just a bit of forward planning and by seeking some professional advice, it is amazing how you can conjure up much needed additional cash to fund worthwhile ventures.

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EMI share option employee limit goes up to £250,000

Enterprise Management Incentive Schemes (EMI) are a great way of tax efficiently tying in and incentivising key employees within a fast growth SME company.

One of the limitations on EMI schemes has been that each employee could only receive entitlement to shares worth up to £120,000. This is all set to change with effect from 16 June 2012 when this limit goes up to £250,000.

It is good to see the Government supporting schemes like EMI that allow employees to share in the potentially significant equity growth of their employer company.

 

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10 Benefits of an EMI Option Scheme for Your Business

I have just set up an Enterprise Management Incentive (EMI) Option Scheme for a (very happy) client and I have a number of others to set up over the coming weeks.

At a time when cash is tight, EMI option schemes are a cost effective and tax efficient way of incentivising key employees.

Here are just 10 reasons why I believe EMI incentives are a great way of incentivising key management:

  1. Employees feel valued as they may one day be shareholders in the business
  2. Employees feel like they’ve received a potentially lucrative bonus (but there is no cash outflow for you)
  3. Employees will start to treat the business like its their own – suddenly downtime and frivolous paper-clip fetishes are a thing of the past as such issues are chipping away at “their” capital growth!
  4. Employees are less likely to leave (as you will no doubt have built in provisions such that the share options lapse if they leave)
  5. Employees can have performance milestones built into the EMI scheme such that they can receive further share options if they do the right things in the business
  6. There is no tax suffered by the employee or employer on the grant of a share option
  7. You can agree in advance the market value of the shares at the date of grant with HM Revenue & Customs so that the employees can have certainty about their personal tax position
  8. Growth in shares under EMI are subject to more favourable capital gains tax rates
  9. Your company should receive a tax deduction on the difference between the market value of the shares at the point of sale and the exercise price
  10. You can structure the EMI options as ‘Exit Only’ such that the employees can only ever get their hands on the shares in the fleeting seconds before a sale of the company – so they can share in the upside of a share sale without hanging around the boardroom seeking to exercise their shareholder rights (albeit that they might only hold a handful of shares!) in the meantime.

Remember, the earlier you set up an EMI scheme the better as you can then peg the HMRC agreed exercise price down as low as possible before the company builds up in value over time.