1 April 2015
Expenditure Credits – Opportunities for the SME
Your company may reduce its Corporation Tax bill by claiming Research & Development Tax Relief. If your company undertakes R&D and is small or medium sized you may be eligible to make a claim under the SME Scheme.
Unfortunately, you can’t claim under the SME Scheme if you’re a subcontractor or the R&D project has received State Aided grant funding. In these circumstances you may be able to claim for the project under the Large Company Scheme. This means that if your company is an SME, and has a number of R&D projects you may be able to make claims for projects under both the SME and Large Company Schemes.
Tax relief on allowable R&D costs operates as an enhanced deduction of either 230%, from the 1 April 2015, of the expenditure incurred under the SME Scheme or 130% under the Large Company Scheme. This enhancement reduces the taxable profit of your company.
For expenditure incurred after 1 April 2013 an “above the line” credit has been introduced for claims made under the Large Company Scheme, known as a Research & Development Expenditure Credit (RDEC).
For profit making companies the credit is used to settle Corporation Tax payable by the company. Under RDEC a loss making company may receive a payable tax credit, this option was not available under the enhanced deduction method for large companies.
Whilst it is generally more advantageous to make an RDEC Claim there are some circumstances where the old enhancement method might be preferable.
As RDEC has only recently been introduced it is advisable to review the options available to you with a specialist. With many years experience advising SME’s on R&D matters IG have specialist able to ensure that you fully identify all costs associated with R&D and the best possible case is made to HMRC.
1 April 2014
Increase in rate of Payable Tax Credit
The rate of Payable Tax Credit (PTC) for loss making SME companies eligible to claim R&D tax relief has been increased from 11% to 14.5% for expenditure incurred after 1 April 2014. The Treasury claim that over the next five years this increase will support £1.3 billion of investment in innovation in the UK.
28 February 2014
New client savings milestone passed
I.G achieves its £3 million milepost in savings for its clients. The addition of patent box consultancy services will further increase benefits to clients in the forthcoming year.
20 June 2013
I.G brings two new vital members to the team
I.G’s continued growth results in two additional personnel being added to the team.
25 March 2013
I.G continues to achieve steady growth
Pass the milepost of £2m of tax savings achieved for our clients. This is a significant achievement for I.G who have forecast 15% growth in the forthcoming year.
12 October 2012
R&D tax news – Improvements contained in recent changes to R&D tax relief legislation – An Update
As we previously reported, in our article written at the time of release of the draft legislation at the end of 2011 on this subject, the Government consulted on ways in which the effectiveness of the relief could be improved. These changes were enacted in Finance Act 2012 this summer and it is clear that not all companies who will be affected by these are aware of the potential benefits. The following is a summary of the recent changes to the relief:
Changes to SME Scheme
The majority of the changes affect companies claiming under the SME scheme. These changes are:
- The rate of additional deduction is increase from the current 100% to 125% for expenditure incurred on or after 1 April 2012. The total deduction for qualifying R&D expenditure is therefore 225%. Although corporation tax rates have been falling, which could have led to an erosion in the effective benefit achieved, the recent increases in the rate of R&D tax relief have more than made up for this.
- As a result of the increase in the additional tax deductions given under the relief the rate of payable tax credit claimable by those companies not paying corporation tax is reduced to 11% of the surrenderable losses from 12.5%. Whilst this looks like a sizeable reduction in the relief it is necessary to keep within the EC state aid limits on the value of the relief due to the increase from 100% to 125% above. The effect of this is to reduce the amount of cash payable to the company from the current 25% of the enhanced losses to 24.75%. This means that non taxpaying companies relying on the cash repayment will not be better off under the new rules.
- The Vaccine Research Relief (VRR) has been withdrawn for SMEs with effect for expenditure incurred on or after 1 April 2012. Previously those companies incurring qualifying expenditure under both the R&R tax relief scheme and the VRR scheme were able to claim both reliefs. From the effective date SMEs will no longer be able to claim under the VRR scheme. For affected companies, and very few claims are being made, any reduction in the support given will be to some extent offset by the increase in the amount given under the R&D tax relief scheme and the further relaxations below.
- The rule limiting the amount of the payable R&D tax credit to the amount of the company’s PAYE/NIC liability paid in an accounting period has been removed with effect for accounting periods ending on or after 1 April 2012. This means that SMEs with small salary and wage bills may now have access to increased cash refunds, an issue which has often prevented such companies from being able to obtain the cash funding that they had hoped the incentive would provide.
- A company that is not a going concern may not make a claim under the SME scheme. The consultation process had invited comments on the potential to change the definition of going concern. What was proposed was a very much more subjective test and one that we were concerned would lead to less clarity for claimant companies. The existing definition is being kept, but the recent change means, in addition to looking at whether the last set of accounts was prepared on a going concern basis, that a company is not entitled to claim relief where it has gone into administration or liquidation. This change has effect for any claims made on or after 1 April 2012.
- The new legislation removed the requirement for a company to spend at least £10,000 on qualifying R&D before it is able to make a claim. We consider that this is good news for the incentivisation of those companies performing R&D at a small scale. Clearly this small scale work may lead to further R&D projects in the future.
- For those companies that have to use “externally provided workers”, where the R&D work is not carried out by employees, but where the labour is supplied by a staff provider, then the existing rules have often prevented companies from claiming all of the costs of these workers. This was due to the need for there to be only three contractual parties in the arrangements. For expenditure incurred on or after 1 April 2012 this restriction is removed allowing there to be any number of parties in the supply chain. This will enable companies to more easily obtain the relief in situations where they need flexibility over the way in which the labour is supplied to them.
9 April 2012
Consultation published on above the line credit for R&D
In its continuing quest to create the most competitive tax system in the G20 the Government has published its consultation document on the introduction of an “above the line” (ATL) R&D tax credit for companies claiming under the large company R&D tax relief scheme.
The ATL has been identified by business as the best way of providing an enhanced take up of the scheme by increasing:-
- Visibility – Those outside the tax department in large businesses will be more aware of the impact of claiming on their R&D cost base.
- Certainty – The ATL credit would provide more certainty over the timing and quantum of benefit, leading to more investment in R&D.
- Benefit to claimants with no tax liability – Companies not paying corporation tax are currently effectively unable to benefit from the large company relief until they have taxable profits. A cash payment of the credit is proposed.
The aim of the consultation is to gather feedback from interested parties into the radical changes in the way that the R&D relief under the large company scheme is delivered, both in the way it is accounted for and the form of the relief itself.
Who will this affect?
The relief, to be implemented from 1 April 2013, will affect those larger companies who currently claim under the large company scheme which is mainly for companies with 500 or more employees and a turnover exceeding 100 million Euros and/or an annual balance sheet total of 86 million Euros.
However it will also affect those SEMs who for one reason or another are unable to claim under the SME R&D tax relief scheme and have to claim under then large company scheme instead. Broadly speaking this includes companies who are controlled by larger groups or who are in receipt of Notified State Aid for an R&D project, or who perform R&D activities subcontracted into them.
The Government have stated that they do not intend to replace the current SME R&D tax credit with and ATL credit, and also that SME scheme benefits are not reduced as the result of the changes to be made.
Main features of the ATL credit
The basic model proposed is as follows:
The ATL credit will be calculated directly from eligible R&D revenue expenditure.
The current adjustment to the company’s taxable profit will be replaced by a credit equal to a currently proposed rate of 9.1% against the R&D expenditure in the company’s profit and loss account. This credit will be subject to corporation tax in the normal way, leading to a net benefit approximately equal to the benefit under the existing scheme. This will lead to an increase in reported profits and effective tax rate when compared to the existing scheme. There would be no change to the definition of R&D for tax purposes of the manner of calculating the qualifying R&D expenditure.
The ATL credit will be payable in cash to companies with no corporation tax liabilities.
This would be a major benefit to those companies in a tax loss situation. The current scheme usually means that the additional deductions generated under the relief are carried forward to be offset against future profits. The proposals envisage a cash payment in respect of the credit for companies without profits. A decision on whether a discount will apply to the payable credit will be taken following the consultation process.
The ATL credit will be taxable.
It is proposed that there will be a minimum rate of credit of .1%, which, taking into account the corporation tax rates of 23% announced for the tax year beginning in April 20131, equates to the benefit that would be achieved under the current scheme. There is a stated benefit of having this “headline” rate, which is perceived by international investors to be important in making investment decisions in UK R&D.
The ATL credit will be administered and settled through the tax system. The tax system is already geared up to deliver the support, checks and balances of payment mechanisms required. Under the ATL credit the link between the value of credit and the tax liability is weakened, a requirement in order to be able to account for it above the line. For a company with a taxable profit the credit would be set off against the tax liability calculated and the net paid to HMRC. For companies not paying tax the cash credit, discounted or not, would be paid net of tax to the company.
24 March 2012
HMRC publishes the new guidance on R&D claims for the production of goods and services
This news item is an update on our earlier article on this subject on 12 August 2011. The basic position is that the activities of production and distribution of goods and services are not R&D. HMRC’s published guidance in this area has prevented claims for costs of consumable items involved in production trials, prototypes and manufacture of “first of class items” where there was any intention of selling the output of the trial, prototype or first in class asset. Recently however the HMRC have been prepared to accept claims in this area providing that basic principles were adhered to, with the expenditure on activities that contribute to an advance in science or technology, as well as producing goods or services for supply to a customer being capable of being part of an R&D project in the right circumstances.
HMRC have now updated their guidance which sets out this principles based approach. The new guidance is welcomed and companies whose R&D activities include production trials, prototypes or first in class projects should review their R&D claim methodology to ensure that they are claiming the right amounts.
20 December 2011
R&D Tax Credits – Improvements confirmed in the Draft Finance Bill 2012
As we previously reported in our article dated 28 September the Government had announced its intention to make changes to the way R&D tax relief operated and to legislate for these in the Finance Bill 2012. The Government published the draft legislation for comment on 6 December 2011 and it contains the following proposed changes to the relief:
Changes to SME Scheme
The majority of the changes will affect companies claiming under the SME scheme. These changes are:
- The rate of additional deduction will be increased from the current 100% to 125% for expenditure incurred on or after 1 April 2012. The total deduction for qualifying R&D expenditure will therefore be 225%.
- The rate of payable tax credit claimable by those companies not paying corporation tax will be reduced to 11% of the surrenderable losses from the current 12.5%. Whilst this looks like a reduction in the relief it is necessary to keep within the EC state aid limits on the value of the relief due to the increase from 100% to 125% above. The effect of this is to reduce the amount of cash payable to the company from the current 25% of the enhanced losses to 24.75%.
- The Vaccine Research Relief (VRR) will be withdrawn for SMEs with effect for expenditure incurred on or after 1 April 2012. Currently those companies that are incurring qualifying expenditure under both the R&D tax relief scheme and the VRR scheme are able to claim both reliefs. From the effective date SMEs will no longer be able be able to claim under the VRR scheme. For affected companies, and very few claims are being made any reduction in the support given will be to some extents offset by the increase in the amount given under the R&D tax relief scheme and the further relaxations below.
- The rule limiting the amount of the payable R&D tax credit to the amount of the company’s PAYE/NIC liability paid in an accounting period will be removed. This will have effect for accounting periods ending on or after 1 April 2012. This means that SMEs with small salary and wage bills may now have access to increased cash refunds, an issue which has often prevented such companies from being able to obtain the cash funding that they had hoped the incentive would provide.
- A company that is not a going concern may not make a claim under the SME scheme. The consultation process had invited comments on the potential to change the definition of going concern. What was proposed was a very much more subjective test and one that we were concerned would lead to less clarity for claimant companies. The existing definition is being kept, however the legislation proposed clarifies that where a company is in administration or liquidation it is not a going concern and is excluded from claiming the SME scheme relief.
Changes to both the SME scheme and the large company schemes
- As announced at the budget the draft legislation removes the requirement for a company to spend at least £10,000 on qualifying R&D before it is able to make a claim. We consider that this is good news for the incentivisation of those companies performing R&D at a small scale. Clearly this small scale work may lead to further R&D projects in the future.
- For those companies that have to use “externally provided workers”, where the R&D work is not carried out by employees, but where the labour is supplied by a staff provider, then the existing rules have often prevented companies from claiming all of the costs of these workers. This was due to the need for there to be only three contractual parties in the arrangements. For expenditure incurred on or after 1 April 2012 this restriction is removed. This will enable companies to more easily obtain the relief in situations where they need flexibility over the way in which the labour is supplied to them.
29 November 2011
R&D Tax Credits – News from the Chancellor’s Autumn Statement 2011
In his Autumn Statement today the Chancellor referred very briefly to the introduction of an “above the line tax credit in 2013 to encourage research and development by larger companies.”
There are no further details to be released at present and we understand this will not feature in the draft Finance Bill 2012 to be published next week.
However we understand that a new consultation exercise will be announced at the time of the budget in spring 2012, to consult on how the proposed rules will work in practice. This will cover the design, complexity and compliance challenges that will arise on implementation of this radical change in the method of giving R&D tax relief to large companies.
t is likely that this major change in the R&D tax relief legislation will only affect larger companies and groups, that is ones with 500 or more employees and a turnover exceeding 100 million Euros and/or an annual balance sheet total of 86 million Euros. However there will be issues associated with the interaction with the current SME scheme and therefore changes may occur to this as well.
Moving the relief “above the line” for large companies will mean moving from the current super deduction against taxable profits to a system that reduces the company’s final tax liability rather than its taxable profits. The above the line credit will have to be payable, meaning that if there was not enough corporation tax payable to offset against the above the line credit then the credit could be set off against other taxes or could perhaps be cashed in for a payable sum. Currently where a large company does not have enough profits to make use of the existing super deduction then it is carried forward as a tax loss to be set off against future profits. So it is likely that a move to an above the line basis will enable the relief to be delivered to large companies faster than it is at present, especially those that are loss making.
Large businesses believe that this method of giving the relief will deliver a significantly better incentive effect, reducing the cost of UK R&D and allowing the UK to compete for International Research and Development more effectively.
Again the Government are demonstrating their commitment to listening to the view of business about how best to target the reliefs that are designed to incentivise the performance of R&D in the UK. We welcome the announcement today and the opportunity to consult on forthcoming implementation of this valuable extension to the relief for large companies.
28 September 2011
R&D Tax Credits – More good news
You may recall that as a part of the budget announcements in March 2011, it was announced that there would be revisions to the SME R&D tax relief scheme aimed at making it more attractive for claimant companies. This firm was an active participant in the consultation process, suggesting these changes to increase the amount of relief that SME’s would be able to claim. Following that consultation process the changes announced by the Government were:
- To increase the additional deduction from 75% to 100% for expenditure incurred on or after 1 April 2011 and from 100% to 125% for expenditure incurred on or after 1 April 2012.
- To abolish the rule limiting an SME company’s payable R&D tax credit to the amount of PAYE and national insurance contributions it pays for expenditure incurred on or after 1 April 2012.
- To abolish the £10,000 minimum expenditure condition for all companies for expenditure incurred on or after 1 April 2012.
At the time of the budget it was made clear that the above changes were to be included in the Finance Bill 2012, subject to State Aid approval from the European Commission (EC). This approval has now been given, and we can therefore expect to see changes in the draft legislation to be published later this year.
At the same time the Government’s extension of the duration of the R&D tax credit scheme for SME and the Vaccines Research Relief scheme for large companies by an additional four years to 31 March 2017 was approved by the EC.
As a notified State Aid, the relief given under the SME scheme is subject to EC approval for any changes. The receipt of this approval enables the Government to continue to improve its support for SME technology businesses by way of a targeted tax relief.
What this means for you
As a company able to claim under the SME scheme for research and development work performed this gives certainty to the increased rate of relief that you will be able to obtain. It will enable you to incorporate this benefit into your R&D plans, business plans and cash flows.
For every £100 of qualifying expenditure on R&D you will now obtain, from April 2011, an additional £100 of tax deductions making a total deduction of £200. From 1 April 2012 each £100 of qualifying expenditure will generate an additional £125 of tax deduction, making a total of £225. If the company is taxpaying then this will reduce your tax liability at whatever your marginal rate of tax is. If you are not paying tax then the relief may be surrendered for a tax repayment of up to 12.5% of this enhanced total deduction for expenditure on or after 1 April 2011.
Before the abolition of the PAYE and NIC cap from 1 April 2012, companies are only able to receive a cash repayment up to the amount of PAYE and NIC paid in the accounting period. In practice this means that companies that have a small payroll, but comparatively large amount of qualifying R&D expenditure, have not been able to receive the cash funding potentially available. From 1 April 2012 companies will now be able to access a cash repayment for the whole of the surrenderable amount.
The amounts available are now potentially very generous and some of the practice hurdles preventing those companies most in need of the additional funding have now been removed, albeit from next year.
How can we help?
We are a specialist provider of consultancy services assisting companies to understand their ability to make claims for R&D tax relief, and how to optimise those claims. We would be happy to talk to you about how you may take advantage of the increasing benefits that will be available to companies carrying out qualifying activities. Please contact John Everingham on 0114 2679005 or 07740 097554.
28 March 2011
R&D Tax Relief – Good news on the inclusion of production costs for manufacturers
HMRC have issued draft guidance on the meaning of production as it relates to the potential for a company to include the cost of manufacturing goods where R&D activity takes place during the manufacture of those goods and then it sells them on to a customer, or intends to.
If you are a manufacturing company undertaking R&D in the process of transferring technology from the ‘bench top’ scale to full scale manufacturing, or involved in the development of working prototypes, or developing ‘first class assets’ then you are very likely to have had experience of being unable to claim as many of the costs as you knew were required to carry out the relevant R&D activities because of restrictive guidance issued to HMRC staff. We have always argued that this treatment did not represent the commercial reality of the R&D process in manufacturing environments and that a less restrictive approach was required if the schemes were to fully reward the R&D activities undertaken.
New draft guidance shows that HMRC have listened to the concerns of businesses and that they are now proposing to adopt a less restrictive view of qualifying costs. In the past HMRC have taken the line that the exclusion of the production of goods and services in the DTI Guidelines on the meaning of R&D meant that if goods were produced as part of the R&D process and they were intended to be, or actually, sold then their cost could not be included in the claim for R&D tax relief. This was widely held by business not to reflect the commercial realities around launching a new manufactured product and to unfairly exclude activities that otherwise fell within the guidelines.
HMRC now accept that if the main point of the R&D activity is experimentation, contributing to making an advance in science or technology, then there are circumstances where the associated costs can be included in the claim, even if the intention is to sell the output from the R&D activity.
So where production trials are required as part of the process of making a scientific or technological advance then the whole of these costs could qualify for the relief depending on the level of scientific or technological uncertainty existing within the manufacturing process.
‘First in class assets’, which are usually high value and complex items commissioned by customers, where it is not feasible to build a prototype purely for R&D purposes, are almost always destined for sale. The draft guidelines are now saying that R&D projects included within the construction of the first in class assets can be eligible and include qualifying costs. So although the total build costs would not qualify it would be up to the company to demonstrate the qualifying activities within the build process and claim the eligible costs.
HMRC have been trialling this less restrictive approach for months in live claims situations and have now produced the formal draft guidance for further comment.
If you are a manufacturing company that has had such elements of the R&D process denied in your claims in the past then you need to understand the impact the new guidance could have on any open claims and future claims. We would be happy to discuss this with you in further detail. Please contact John Everingham on 0114 2679005 or 07740 097554.
24 June 2011
R&D Tax Credits – HM Treasury publishes latest response and further consultation
This is the next stage in the consultation process following on from the consultation launched in November 2010. The responses to that consultation have been considered and indeed the budget in March 2011 contains some of the enhancements to the SME scheme suggested, being the increase in the additional tax deduction from 75% to 100% from 1 April 2011 and to 125% from 1 April 2012, subject to EC approval.
The latest stage in the process comments on the consultation responses received to date and includes further consultation on the Government’s views on potential changes to the schemes. These are aimed at removing barriers currently experienced by companies claiming credit and providing greater certainty about what costs qualify for the relief. The following is an overview of the key proposals.
‘Above the line’ accounting for the relief
The most significant response from large companies was a proposal to move from the current super deduction method to a system that uses the relief to directly reduce the company’s tax liability rather than being a reduction in the tax charge in then profit and loss as it is at present. It is believed that this will enable the benefits of the relief to be delivered more directly to the R&D departments, rather than to the finance function, thus more directly encouraging increased R&D activity. If a company does not have enough corporation tax liability to offset against the above line credit then it has been suggested that the credit could be offset against other taxes payable. This payable credit would also, for the first time, allow companies claiming under the large company scheme to obtain an immediate cash benefit if they were in a loss making position. The Government recognises that this proposal would be a major upheaval to an already well understood system and are seeking the views of business on how such a move would stimulate additional R&D in the UK. In addition they invite views on how the additional complexities and potential costs to the Government of any implementation would be resolved and understood.
At the Budget it was recognised that where work is subcontracted into a company the current rules may lead to the work not qualifying as R&D in the hands of the company carrying out the work if, taken in isolation, this work is routine in nature, even if it is part of the customer’s R&D activities. It is proposed that the resolution of this issue would involve some collaboration between the parties. Views are being sought on the most practical way of determining that the subcontractors work is part of the customers qualifying project so that the subcontractor can claim. Potential solutions suggested could include either a certification from the customer that the work is qualifying R&D or a joint election between both parties, both designed to allow the subcontractor to claim for the work.
Not surprisingly respondents to the first consultation suggested a wide range of additional costs that they considered were part of the R&D process and should be included for additional relief.
One area which it was felt restricted the ability of companies to claim was in the area of externally provided workers, one example of which is agency staff and another is staff employed within a group but working for various group companies. It is proposed that the currently restrictive definition of exactly which contractual arrangements between the claimant company and the staff provider or agency company and any other companies involved, qualify for the relief is to be widened in the forthcoming legislation to be released in the autumn. It is hoped that this will allow claims previously denied where the substance of the arrangement is that of the provision of staff carrying out R&D despite the precise legal structure of the arrangements.
However the Government has decided that no other additional categories of qualifying expenditure will be added as it feels that these would only produce limited additional benefit in comparison to the amount of additional complexity in the legislation required.
Removal of the PAYE/NIC cap
The Budget announced the welcome withdrawal of the PAYE/NIC cap on the amount of cash credit that a loss making SME could claim. This will allow SME companies currently restricted in the amount of cash credit they can claim to access greater levels of financing from the Government. This is scheduled to come into effect from 1 April 2012 and will particularly benefit those companies who incur much of their costs not on employees but in subcontracted out R&D activities or where there is no or little remuneration for the employees or directors. However HM Treasury are interested in understanding the views of business on the potential for this significant future enhancement of the benefit of the relief to be abused.
Currently SMEs are unable to claim the SME relief if the company is not a going concern at the time the claim is made. This test is by reference to the latest published set of accounts. The Government are concerned that this is not flexible enough as the company’s circumstances may have changed since these accounts were published. They are proposing a move to a test based on the EC guidelines on companies in difficulty, which are currently used in determining the availability of tax relief for the UKs Enterprise Investment and Venture Capital trust schemes. In our view these are considerably more subjective in nature, which may also lead to uncertainty in practice.
Following a rethink on the practical application of previously published guidance on the inclusion of certain costs of goods produced, and a period of working with companies to resolve claim disputes on this point, HMRC will be improving their guidance in this area. This will make it clear that where goods are created it is the degree to which their creation directly contributed to an advance by resolving technological or scientific uncertainty that will determine whether or not they can be claimed. This change in stance and the recognition by HMRC of the commercial realities involved and that improved guidance is required to give taxpayers certainty over the amounts to be claimed is welcome.
The response to the setting up of a formal advance clearance process for R&D claims, in order to give claimants certainty, was mixed. Claimants can currently discuss issues with the Specialist R&D units. However it is proposed to operate a pilot scheme, to be introduced in the autumn, to determine how best to introduce a more formal system of voluntary advance assurances on claims to be made by SMEs and new start ups who have yet to make their first claim. So it would appear that it is not intended to cover those companies who are already claiming.
The intention is that companies applying for and receiving assurances on their claim methodology would be able, unless their circumstances change, to be able to rely on this for several years, This should provide more certainty over the amounts to be claimed and over any cash credit.
The continued consultation, and the fact that the Budget included a real demonstration of the desire to listen to the consultation responses on a wide range of issues, is a very positive step in ensuring that the R&D tax relief schemes promote companies to carry out additional R&D.
27 March 2011
R&D Tax Credit – Good news for SMEs in the budget
Today’s budget contains some really good news for those SME technology companies claiming the R&D tax relief.
The recent consultative process indicated a number of areas that companies were identifying as barriers to the relief being as effective as it needed to be.
Three of those areas have been addressed in the budget and these will be of particular interest to the population of SMEs.
Firstly the rate of relief will increase substantially over the next two years. Currently and SME can claim an additional 75% of the cost of qualifying R&D. This can then reduce the corporation tax payable if the company is paying corporation tax, or can be surrendered for a cash repayment if it has losses in the period.
For expenditure incurred after 1 April 2011 the rate of additional relief on qualifying expenditure will be 100%, giving a 200% deduction with the same ability to use this to reduce corporation tax payable or to surrender the enhanced losses for a cash payment.
For expenditure incurred on or after 1 April 2012 the rate of relief will rise to 125% meaning that 225% of the qualifying expenditure will be able to be used to reduce corporation tax payable or, if this creates tax losses, for this to be surrendered for a cash repayment.
Where changes have been made to the rate of the relief in the past the Government have reduced the percentage at which companies can cash in enhanced losses under the scheme to keep the aid intensity broadly similar. For expenditure incurred on or after 1 April 2011 SMEs will be able to surrender enhanced losses for 12.5% of their value. This is a slight increase on the current position. Currently this is worth 24.5% of the qualifying cost of R&D; from 1 April 2011 this will rise to 25%, an increase of 0.5%. It is highly likely that this 25% benefit will be maintained for expenditure incurred from 1 April 2012, due to EC rules on the amount of cash aid that can be given by a Government.
Removal of PAYE and NIC Cap
Secondly many SMEs have been unable to surrender all the enhanced losses created by the relief due to the existence of a cap on the amount of losses surrenderable equal to the amount of PAYE and NIC paid by the company in the period. In response to consultation the Government have announced that from 1 April 2012 this cap will be removed. From that date companies with a large spend on R&D in proportion to the number of employees and salary bill they have will be able to claim a payable tax credit for the full amount of the relief available. This is a situation common to many start up SMEs and could significantly improve their cash flow and the impact the relief has on encouraging technological innovation. This change will be incorporated in the Finance Bill 2012.
Removal of minimum R&D spend condition
Lastly, sending an important message for the encouragement of innovation for whatever size of project, it is proposed to remove the current de minimis limit of £10,000 before a company can claim. Again this measure will be brought in as part of the Finance Bill 2012.
The above changes will be dependent on the receipt of State Aid approval from the EC and the changes from 1 April 2012 will also be subject to further input from the consultation process.
The Government have also noted the intention to look at making changes to the rules governing the provision of relief under the large company scheme for work done by companies to whom work has been subcontracted as, in practice, this is an area which leads to some confusion on the qualifying nature of the work undertaken.
Whilst the above is good news for SMEs, it had also been announced that the amount of relief for SMEs available under the little used Vaccine Research Relief scheme will fall to 20% from 1 April 2011 and then not be available from 1 April 2012.
This is a positive response to the issues raised in the consultation. The changes should benefit SMEs greatly providing further relief for manufacturers and value added technology businesses.
Clearly with the positive changes announced above there is even more necessity for companies to ensure that they are optimising the benefits they receive under the scheme and to take advice to ensure they achieve this.
12 January 2011
R&D Tax Relief/Credits – HM Treasury consultation launched – closing date 22 February 2011
There has been talk of the Government potentially making changes to the current R&D tax relief schemes to refocus the support that R&D tax credits provide for innovation. Sir James Dyson published his report, commissioned by The Conservative Party in March 2010 which contained views on how to awaken Britain’s innovation and creativity. A draft of new proposals were produced refocusing the R&D tax relief on high tech companies, small businesses and new start ups.
The Government announced its intention to review the effectiveness of the R&D tax credit scheme in the June 2010 Budget and to consider the proposals made in the Dyson report. The resulting consultation document published in November 2010 sets out the Government’s thoughts on the potential to make changes to the current schemes. The consultation document covers two aspects of taxation concerning innovation and intellectual property. First was a possible approach to the design of a “Patent Box” regime which would introduce a 10% rate for profits on revenue generated through patents. Second was the review of the support afforded to innovation by the existing R&D tax credits regime.
This article concentrates on the consultation on the R&D tax credits schemes. This covers the structure and scope of the schemes, the potential to refocus the schemes to encourage investment in R&D by the smallest companies, and the potential to streamline the claims process. Prior to the release of the consultation HMRC had commissioned independent research into the impact of the R&D tax credit schemes on the decision making processes of companies investing in R&D and had undertaken internal evaluation work on the impact of the schemes on the levels of R&D expenditure undertaken by companies. For some time it had been rumoured that, following the Dyson report, the schemes may have been under threat. It would appear that this is not the case and document asks for the opinions of taxpayers and advisors on the following areas:
- Are there any structural changes that would significantly improve the impact of the schemes in stimulating R&D investment by UK companies?
- Are there any additional costs that should be eligible for relief?
- Are there any costs that should be excluded from the schemes? The document gives internal use software as an example of a cost that could be excluded. It is thought that this example probably refers to the costs of developing internal use software being excluded.
- Is the definition of R&D for tax purposes contained in the BIS (DTI) guidelines effective for recognising genuine R&D activity?
- Should there be a statutory definition of production and if so what should it include and exclude? Any activities which amount to production are currently excluded under current HMRC guidance on the interpretation of the BIS guidelines on the meaning of R&D.
- What enhancements would be most effective in promoting further investment in R&D by the smallest companies, without introducing more complexity?
- Is the Vaccine Research Relief (VRR) an effective way of incentivising R&D investment into drugs and vaccines targeted at the diseases most prevalent in less developed countries? Would it be more effective to deliver support under another mechanism? Recent statistics have shown that only ten claims a year are made under this scheme.
- Are there improvements to the claim process to streamline it and give it more certainty over the outcome that could be made, particularly for smaller companies with more limited resources, for example an external auditing process or a formal pre clearance procedure?
Since the inception of the schemes in 2000 and 2002 there have been many changes to the legislation together with changes in the guidance on the practical application of the schemes and of the definition and interpretation of the meaning of R&D.
This consultation gives the science and technology business community a chance to influence the policy direction in what many of these companies see as a vital support for the R&D they undertake.
12 January 2011
R&D Tax Relief/Credits Scheme – Ownership of intellectual property no longer a requirement
The rules for small or medium sized companies (SMEs) in this area have now changed allowing more companies to claim R&D tax relief and receive R&D tax credit payments.
Previously SMEs have been prevented from claiming R&D tax relief/credits unless they have owned any intellectual property derived from the R&D activities carried out. This restriction applied whether the company was otherwise eligible to claim under both the SME scheme or the large scheme. This meant in practice that unless the R&D activity was subcontracted to the SME, in which case a claim under the less generous large company scheme may have been available, SME companies not owning the IP could not make a claim for R&D relief.
On 16 December 2010 the legislation was changed to remove this requirement. This was first proposed in the pre budget report of 9 December 2009 and was subsequently left out of the two earlier Finance Acts of 2010. The lifting of the IP ownership condition is effective for claims made for accounting periods ending on or after 9 December 2009. Companies that were previously affected should ensure that claims for periods ending after this date correctly reflect all expenditure claimable.
This change is a reflection of the complexity of the R&D tax relief rules for SMEs and indicates how the frequent changes in the legislation and practice can lead to under or over claims if the claim methodology is not regularly reviewed.
If you wish to discuss IP matters, please do not hesitate to contact John Everingham on 0114 2679005 or 07740 097554.
20 June 2010
I. G achieves 1st major milestone
Pass the milepost of £1m of tax savings achieved for our clients. This is a significant achievement for I.G who have forecast 30% growth in 2011 and 2012.