Evaluation of R&D relief and Patent Box scheme in the UK and Belgium
1. Introduction 1
2. UK’s Research and development relief 1
2.1 definition and schemes 1
2.1.1 Small or medium-sized enterprise (SME) scheme 1
2.1.2 Large company schemes 2
2.2 Qualifications 2
2.3 Consultation and appraisement 3
2.3.1 Equity 3
2.3.2 Externalities 3
2.3.3 Further evaluation 4
3. UK’s Patent Box scheme 4
3.1 Definition and Objective 4
3.2 When and how to claim 5
3.3 Qualification 5
3.3.1 Patent Box 6
3.3.2 Qualified Income 6
3.4 Consultation and appraisement 6
3.4.1 Equity 6
3.4.2 Efficiency 7
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2. UK’s Research and development relief
2.1 definition and schemes
As demonstrated by Derregia and Chittenden (2006:3), compared with US, Germany, France and Japan, UK has been facing a steady decrease in R&D investment as a percentage of GDP since 1987. Hence, a R&D relief was introduced from 2000 to promote the high technology business and the advancement of knowledge economy.
According to HMRC, R&D relief is a Corporation Tax relief for companies and organizations that are liable for Corporation Tax.
3.1.1 Small or medium-sized enterprise (SME) scheme
This scheme provides a relatively higher rate of relief than that for larger corporations, a 225% tax relief on allowable R&D costs. It means that from tax year 2012/2013, SMEs are given a further decrease of £125 on top of each £100 of qualifying cost on their annual taxable income, including a possible payable credit.
To be classified as a SME, a company with R&D expenditure commencing from August 2008 should possess fewer than 500 employees and either an annual turnover below €100 million or a balance sheet less than €86 million.
3.1.2 Large company schemes
From 1 April 2008, large companies can claim a 130% tax relief on qualifying R&D expense, which can be carried forwards or backwards with an allowable trading loss.
Additionally, British government introduced an initially optional ‘above the line’ taxable credit (ATL) along with enhanced-deduction scheme for cost incurred on or after 1 April 2013, which offers large companies with a tax relief at 10% of qualifying R&D expenditure.
HMRC defines that an R&D project must be within the corporation’s trade, which aims to achieve a scientific or technological advancement in overall rather than individual knowledge or capability through the resolution of uncertainty in these fields.
After meeting all the necessary criteria, the Department of Trade and Industry (DTI) stipulates that tax relief can only be claimed on revenue expenditure, which refers to the expenses (can be proportioned if partly involved in the R&D activities) incurred in the daily operation of the business instead of capital expenditure on assets.
3.2 Consultation and appraisement
Derregia and Chittenden (2006:2) state that the potential and substantial advantages of R&D incentives for firms with small R&D activities tend to be much absorbed by the tax-claiming expenditure.
Therefore, This commentary points out that within the dimension of large companies or SMEs, those spend greater amount of money in R&D projects are likely to be benefited more, which is in accordance with the benefit principle. However, a corporation who wholly involved in R&D activities but spend less cash in qualifying expenses than others within the same scheme, may regard it as unfair to claim less deduction in taxable income.