Transcript Title 36pt Arial regular one or two lines

HMRC Research and
Development
Alan Dickinson & Andy Bostock
Manchester Specialist Unit
Agenda – R&D Tax Relief
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Why was it introduced
General Conditions
How the relief works
What is research & development for tax purposes?
What expenditure qualifies
The treatment of grants and subsidies
Recent developments – consultation process.
How to make a claim
Practicalities of claiming and a worked example
Help and further information
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Some background
The R&D tax relief schemes are part of a
challenging Government goal to raise levels of R&D
investment as a whole to 2.5% of GDP by 2014.
United States
2.90
Germany
2.70
France
United Kingdom
2.50
UK future scenario
%
2.30
2.10
1.90
1.70
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1.50
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Some background
Two R&D schemes introduced to encourage UK innovation.
• The first, for small and medium companies. This is
a Notified State Aid.
• The second provides relief for large companies and
is not notified.
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Nearly 9,000 claims now made each year…
10,000
9,000
Large company scheme
SME scheme
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Source: HMRC National Statistics based on CT returns.
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…for almost £980 million of support
1200
Large company scheme
1000
SME scheme
800
600
400
200
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Source: HMRC National Statistics based on CT returns.
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General conditions
• Only available for companies.
• R&D expenditure must be relevant to the company’s trade.
• Minimum £10k p/a spend on qualifying costs. (This
condition will not apply to expenditure incurred after 1 April
2012)
• Excludes capital expenditure (on which 100% Research
& Development Allowances are available).
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How the relief works
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R&D tax credits – company tax relief which gives an increased
deduction for qualifying R&D expenditure.
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The increased deduction reduces the taxable profits and hence the
amount of corporation tax payable.
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Loss making small or medium companies can in certain
circumstances surrender the R&D losses arising as a result of the
increased deduction in return for a payable credit. (more on that later!)
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How the relief works
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The level of relief available depends upon which R&D relief
scheme a company falls within.
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The small or medium company (SME) scheme allows
for an enhanced deduction of 175% of the company’s qualifying
expenditure. (This has been increased to 200% from 1 April 2011.)
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The large company scheme allows for an enhanced deduction
of 130% of the company’s qualifying expenditure. (Previously
125% before 1 April 2008.)
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SME or Large
Pre 1 August 2008
Post 1 August 2008
< 250 Employees
< 500 Employees
and
and
Annual turnover not
exceeding €50m
Annual turnover not
exceeding €100m
or
or
Balance sheet totalling no
more than €43m
Balance sheet totalling no
more than €86m
The extended post 1 August 2008 definition is for R&D
Tax Relief purposes only.
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So what is R&D for tax purposes?
• The DTI guidelines explain what is meant by R&D
for a variety of tax purposes.
• Tax definition differs from Commercial definition.
• R&D takes place when a project seeks to achieve an
advance in science or technology.
• Activities which directly contribute to achieving the
advance through the resolution of scientific or
technological uncertainty are R&D.
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So what is R&D for tax purposes?
• A scientific or technological uncertainty exists when knowledge
of whether something is scientifically possible or technologically
feasible, or how to achieve it in practice, is not readily available
or deducible by a competent professional working in the field.
• Uncertainties that can be readily resolved by a competent
professional working in the field are not scientific or
technological uncertainties.
• Must be an advance in knowledge or capability in the
field – not just the company’s own state of knowledge
or capability.
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Possible commercial project time line –
defining R&D for tax purposes
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Examples of qualifying & non-qualifying projects
An individual
Has a an idea to produce an innovative food container which will greatly
improve shelf life and reduce waste costs, by also being bio-degradable.
Embarks on R&D in relation to the materials used to achieve this.
(It is accepted this is uncertain to the competent professional and
represents a scientific and technological advance).
He introduces capital into the business and draws no salary to keep
the costs down and fund the R&D.
Does not qualify for R&D relief as not incorporated.
Also, the strategy of paying no salary reduces what is usually
the largest R&D allowable cost, were he incorporated.
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Examples of qualifying & non-qualifying projects
A software company which designs computer games, writes
a new story line for an X-Box / PS3 game.
No matter now inventive the story line is that in itself is not R&D.
However the changes in the code, language and object interaction
required to achieve the response speeds needed to run the game
on a desktop games console was ground breaking in the software
field and was qualifying R&D.
The qualifying costs related to the activities during this period of
uncertainty and which were directly related to resolving the code
problems. This qualifying period ceased when these issues were resolved.
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Examples of qualifying & non-qualifying projects
Other local industry sectors which may more obviously qualify include:
Life & health sciences including pharmaceuticals and new drugs.
Agrifood – reduced salt content versus shelf life & taste and foods with
positive health benefits.
Advanced materials – including the development of new materials, the use
of new materials in existing processes to significantly improve efficiency or
performance.
Advanced engineering – e.g. the automotive industry weight & energy
efficiencies.
• Focus on the advance being achieved and not the industry or product
aspiration, specification or design.
• Involve the people actually doing the work in the considerations /
decisions.
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Qualifying R&D expenditure
Is expenditure on:
• Staffing costs (CIRD83000/83200)
• Consumable items (82300/82400)
• Software (CIRD82500)
• Externally provided workers (Relief on 65%)
(CIRD84000/84100)
• Subcontracted R&D (Relief on 65%) (CIRD84200/84250)
• Contributions to independent research (Large Scheme)
(CIRD82200)
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Some other conditions
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The amount of payable credit (SME Scheme only) claimable is up
to 14% of the surrendered R&D loss (16% prior to 1 August 2008).
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This is limited to the company’s PAYE and NIC liabilities payable
for payment periods ending in that accounting period and where:
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Accounts are prepared on a going concern basis
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Finance Act 2010 abolished the Intellectual property (IP) condition in
the SME scheme for expenditure in accounting periods ending on or
after 9 December 2009.
Special treatment for grants & subsidies.
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Grants & Subsidies (Main Principles)
SME Scheme
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Grants & subsidies are deducted and R&D claim made on net
allowable expenditure.
If grants are Notified, no claim possible under the SME scheme,
but may still claim under large scheme.
Large Company Scheme
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Grants & subsidies not deducted and R&D claim made on gross
allowable expenditure.
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Grants & Subsidies
SME Co Ltd receives a grant for R&D work. What are the implications?
1. If grant is a notified state aid:
• No relief available under SME scheme.
• But could still get relief under large company scheme, i.e. @ 30% on
gross costs.
2. If grant is not a notified state aid:
• Grant deducted and relief on net costs @ 75% under SME scheme
(plus)
• Amount of grant not allowable under SME scheme, may be allowable
under large scheme @ 30%.
N.B. The grant receipt is taxed under the normal taxing provisions.
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Grants – practical examples
A Ltd a SME spends £100k on qualifying R&D with a £40k subsidy which
is a notified state aid ( to include ‘Grant for R&D’ etc)
• R&D Costs
£100,000
• Less funding
£40,000
• Net project cost
£60,000
No Claim Under SME scheme BUT can claim under large scheme
R&D tax relief
£100,000 @ 30% =
£30,000
Tax saved enhanced exp
£30,000
£8,400
Plus accounts deduction
£100,000 @ 28% =
@ 28% =
£28,000
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Grants – practical examples
A Ltd a SME spends £100k on qualifying R&D with a £40k subsidy which
is not a notified state aid:
• R&D Costs
£100,000
• Less funding
£40,000
• Net project cost
£60,000
R&D SME tax relief
£60,000
@ 75% =
£45,000 Plus
R&D Large tax relief
£40,000
@ 30% =
£12,000
Tax saved enhanced exp
£57,000
@ 28% =
£15,960
Plus accounts deduction
£100,000 @ 28% =
£28,000
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Recent developments
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November 2010 – Consultation on Corporate Tax Reform including R&D Tax
Credits and Patent Box published.
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March 2011 - Budget proposals.
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April 2011 – Finance Act 2011 changes operative
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June 2011 – Treasury response to Consultation.
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June 2011 – Further period of consultation announced.
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September 2011 – 2nd consultation period ends.
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October 2011 – Assurance Pilot commences.
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April 2012 – Further budget changes introduced.
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How R&D Relief is claimed
• In full company tax return at end of accounting period.
• The tax relief will benefit the company on its usual
corporation tax payment date for the accounting period.
• The SME Scheme payable tax credit is normally paid
within 28 days of receipt of the claim by the appropriate
R&D Specialist Unit.
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Practicalities of claiming
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No specific form/standard.
Outline of project.
Outline of the uncertainty to be resolved.
Details of the allowable costs on direct resolution.
Call HMRC in early.
Sampling.
Backdated claims possible (within the anniversary of
the filing date).
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A SME practical example
Costs
Allowable
R&D staff (x3) with total costs £150,000 and
80% of time directly on R&D
£150,000 x 80% allowable as staff costs
£120,000
R&D Manager’s costs £100,000 with 20%
of time directly managing the R&D activity
£100,000 x 20% allowable as staff costs
£20,000
Heat & light £5000 with 25% consumed
in R&D project
£5,000 x 25% as consumable items
Disposable laboratory equipment consumed £200
£200 as consumable items
£80,000 payments to an unconnected
subcontractor for specific R&D work
65% of payments allowable as
subcontracted R&D
£80,000 x 65% = £52,000
£70,000 payments to unconnected staff provider
for staff directly engaged on R&D
65% allowable as an externally
provided worker
£70,000 x 65% = £45,500
Total qualifying expenditure
Qualifying Expenditure
£1,250
£200
£238,950
SME Scheme enhanced expenditure
£238,950 x 175%
SME Scheme enhanced R&D Relief @ 75%
£238,950 x 75%
£418,163 claimed at Box 101 on CT 600
Additional deduction due £179,212.50
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Help in making a claim
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HMRC website at hmrc.gov.uk/ct/forms-rates/claims/randd.htm
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The HMRC Corporate Intangibles and Research & Development
(CIRD) Manual at:
www.hmrc.gov.uk/manuals/cirdmanual/index.htm
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The R&D Specialist Units
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And finally…
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Questions