Guide to R&D Tax Relief

Transcription

1 Delivering Profitable Innovation The MSC R&D Guide to R&D Tax Relief Don t Waste Your Investment in Innovation Maximise Your R&D Tax Relief

2 Contents Introduction Can You Qualify for R&D Tax Relief? R&D Tax Relief Schemes Summarised R&D Tax Credits Explained How R&D Tax Relief Works Is Your Company an SME? The Rules of R&D Tax Credits How to Claim R&D Tax Credits RDEC - The PAYE Cap - SMEs and RDEC How Contractual Arrangements can Affect the Entitlement to Claim How HMRC Approach R&D Tax Relief HMRC Enquiry Patent Box R&D Capital Allowances The Specialist Approach R&D Tax Relief The MSC R&D Team Way How do I get Started? Examples of Eligible R&D Projects Disclaimer Page P2

3 Introduction The UK Government s R&D Tax Relief schemes encourage and reward both SMEs and large companies for investing in innovation. They offer a vital means to cut costs and improve cash flow, whilst still keeping ahead of the competition. In addition to R&D Tax Credits and R&D Capital Allowances, companies can now also claim Tax Relief via the Patent Box aimed at companies looking to exploit patented innovations. These schemes are complex and require detailed knowledge and understanding in order to take full advantage of them. This is why the majority of companies either don t claim or under claim. Or, worse still, over claim with no justifiable evidence in the case of an audit by HMRC. This guide is designed to give you a better understanding of these schemes and how best to take advantage of them. Can You Qualify for R&D Tax Relief? Although knowledge of the relief is spreading, many eligible companies still do not claim. This is often because companies don t understand the scope of what R&D projects are eligible and, therefore, don t feel that what they are doing qualifies. This lack of understanding is preventing companies from benefitting from the schemes and losing out on potentially tens, if not hundreds of thousands of pounds of valid R&D Tax Relief. If your business is a UK limited company and, in the past two years, you can answer yes to one or more of the following questions, then you could well be eligible: Have you manufactured or developed new/existing products, devices, systems? Have you developed or improved any software, in house? Have you developed bespoke new products for clients which involved you undertaking R&D? Have you made efficiency improvements to any of your processes? Has there been a requirement to change your processes, products, systems, technical devices or services because of legislation changes? Other companies may be worried that a poorly constructed or supported claim may lead to trouble with HMRC. This is where a specialist in claim preparation can provide the necessary reassurance that your work qualifies and that the right expenses have been claimed. P3

4 R&D Tax Relief Options Summarised Notes: (a) Expenditure credit is taxable. 12% applies for expenditure on or after 1 April 2015 (b) 230% SME superdeduction rate applies for expenditure incurred on or after 1 April 2015 (c) Tax credit available to loss making SMEs who surrender tax losses in exchange for cash credit. Other rules apply. 14.5% rates applied for expenditure incurred on or after 1 April R&D Tax Credits Explained The R&D Tax Credit scheme was introduced by the government for SMEs in 2000 and extended to Large Companies in Any company developing new products, technology or processes may be eligible. It is a tax relief scheme, designed as an incentive for companies developing new technology the more qualifying development work a company does, the greater the relief it can get from its Corporation Tax bill. Even loss making companies can benefit (in terms of a Credit ) which can be of particular importance to early stage businesses. The scheme is one of the most attractive in the world and a company can claim retrospectively for up to two previous accounting years. The benefits to a company vary according to the level and cost of development undertaken, whether it is an SME or a Large Company, and its Corporation Tax, but it is not unusual for expenditure to run into hundreds of thousands of pounds, with tax relief typically in excess of 30,000 being realised. P4

5 How R&D Tax Relief Works If a company incurs qualifying expenditure (in categories such as staff costs) on R&D, it can enjoy an extra deduction from its taxable profits, so its corporation tax bill will be reduced. If the tax has already been paid, then a refund will be received from HMRC. For SMEs the rate of enhanced deduction is currently an extra 130% meaning a cash saving of 24.7% of the eligible R&D cost (assuming the tax rate to be 19%). Not all SMEs (and particularly early stage start-ups) will have taxable profit, so an extra deduction from taxable profits would not be of immediate use to them. Instead, loss making SMEs can convert their losses (attributable to qualifying R&D spend) to cash, at a rate that currently amounts to approximately 33% of their qualifying spend on R&D. These reliefs for SMEs are very valuable and can provide cash at a critical stage to support the continuing R&D effort. For Large Companies, the R&D Expenditure Credit (RDEC) provides a cash payment (taxable) of 12% of the qualifying R&D expenditure instead of a deduction from taxable profits. This credit is available even if the company has no other taxable profits. Is Your Company a Small or Medium Enterprise? To qualify for the more generous SME relief your company has to have less than 500 employees and either have annual turnover not exceeding 100m Euros, or have total balance sheet assets not exceeding 86m Euros. In arriving at staff, balance sheet and turnover numbers for your business you have to include: the total figures for any linked enterprise (you would test for these in a similar way to deciding if your accounts need to be consolidated), and; an appropriate proportion of the numbers for any enterprise that owns 25% or more of your company s capital or voting rights, and; an appropriate proportion of the numbers for any enterprise that your company owns 25% or more of the capital or voting rights for. The precise definitions of linked and partnership enterprises are based on a modified European Community definition which also includes certain exceptions. To establish whether you are entitled to claim under the SME relief regime, or have to claim under the less generous RDEC regime for larger companies, we recommend you get specialist assistance, as this can be a complicated area. (N.B) The definition of a SME will have to be kept under review as the Brexit process unfolds. P5

6 The Rules of R&D Tax Credits Of course there are rules. The expenditure has to be on qualifying R&D, in line with a published definition. This definition is a broad-based one that goes well beyond blue sky R&D and includes technological and software development up until the technological problems have been solved, and you have something which only requires minor adjustments before it can be used or commercially released. The expenditure on this R&D then has to be checked to make sure it is revenue in nature (rather than capital), and meets rules covering what expenditure qualifies: so for example there are special rules concerning subsidised or subcontracted expenditure, and rules defining what expenditure falls into eligible categories The meaning of R&D in the context of R&D Tax Credits is not straightforward and wider than most companies realise. It is not limited to the R&D department. HMRC defines R&D as work that achieves a scientific or technological advance when scientific or technological uncertainty exists. This can include: achieving an increase in overall scientific or technological knowledge or capability; significantly improving products, processes, materials or services through scientific or technological development; using science or technology to duplicate the effect of an existing product or process in a new or appreciably improved way. The whole project may not qualify, only the element addressing the technological uncertainty. This is not always easy to identify, but can include planning and managerial activities in some instances. With software R&D, where development is ongoing, identifying the areas of technological uncertainty in projects is critical, as many more routine activities will not qualify. Software R&D can cover a very large part of the development process from testing suitable data sources and filtering techniques through to fit for purpose testing of a scaled up prototype. However, identifying this in a way acceptable to HMRC is a skill developed over numerous claims. P6

7 How to Claim the R&D Tax Reliefs Generally speaking, you have two years from the end of an accounting period to claim the R&D relief for expenditure deducted in that period. A company can prepare and submit its own claims. However, that means they have to understand how the R&D definition is applied in practice, master the detail of what expenditure qualifies under the rules, and also understand how to present this so HMRC understand it and are satisfied by it. The alternative is for you to do what you do best develop the technology and run your company and to use a specialist like MSC R&D to prepare the claim for you; most companies choose this route. R&D Expenditure Credit (RDEC) In 2013 the government introduced a new tax relief for Large Companies, the R&D Expenditure Credit (RDEC). Currently, this provides a cash benefit of 12% (taxable). Because it is a cash benefit, it is designed to be able to be accounted for above the line in the accounts, i.e. as income rather than tax. This means it can be more visible in the accounts and technology budget holders in Large Companies are more likely to be able to identify it as a valuable addition to their budgets, rather than the company just treating it as a tax windfall. The relief is currently worth 9.72% of qualifying spend in cash terms to a 19% corporation tax payer. To simplify matters, the qualifying rules and administrative procedures are effectively identical to those that applied for the previous Large Company R&D relief. However, some complexity of detail can arise in how you set the RDEC off against existing or future tax liabilities before getting actual cash. HMRC are still developing administrative procedures to deal with this process so it is a good idea to use a specialist adviser who understands the detailed rules. P7

8 The PAYE Cap This limit is to protect the UK Treasury against companies claiming RDEC in the UK, but doing all their R&D work abroad (e.g. through a branch). It means that the claimant cannot get out more in RDEC than it pays in PAYE and NIC attributable to the R&D workers. Although this may sound like a worrying obstacle, it is only intended (and likely) to bite where a lot of the R&D work is done abroad or using third party agency workers. MSC R&D can advise how to structure the claim to minimise any risk here. If the RDEC claimed exceeds this cap, it is carried forward as though it is claimed in the next Accounting Period and is tested again until there is sufficient PAYE/NIC available to frank it. SMEs and RDEC For expenditure which SME companies had to claim under the Large Company scheme (because of subcontracting or subsidy issues), these companies can now make a RDEC claim, which means that for the first time, loss making SMEs can get cash for this sort of R&D expenditure. How Contractual Arrangements can affect the Entitlement to Claim under the SME Regime If the R&D has been subcontracted to your company, or if it has received a grant or subsidy to cover the costs of the R&D work, it will not be able to claim under the SME regime in respect of this expenditure. Instead, it will have to claim under the less generous RDEC relief regime for larger companies. If any grants are State Aids there are additional rules to consider. There are some complications here: Whether the R&D itself has been subcontracted What amounts to a subsidy Whether any grants are State Aids and, if so, how this affects the claim How HMRC approach R&D Tax Relief While the very large companies are dealt with separately, most R&D claimants will have their claim dealt with by a specialist HMRC R&D office. Initially, the tax return containing the claim will be entered onto the HMRC systems by a large clerical team dealing with returns in general The system will note that there is an R&D claim and will refer it to a specialist office. This is staffed by tax people rather than technologists, but they are familiar with dealing with R&D claims and will try to be broadly consistent with other R&D offices, and constructive and helpful in their approach. They do not always succeed in this latter aim (we are all human and they are working under tight resource pressure), but this is the framework they seek to work within. Although most enquiries into claims are based on risk features identified in the claims, some claims may be selected randomly for enquiry at this stage, to check that the targeted selection process is not missing something. Within the R&D office, the claim will be initially reviewed to see if it is broadly in the right format and does not contain obvious errors. Depending on the scale of the claim and the degree of risk of error that HMRC sees, it will either be accepted at this stage or referred for more detailed enquiry. P8

9 HMRC R&D Enquiry An HMRC enquiry is something to avoid if possible. It requires the company to persuade technically unqualified HMRC staff that there is a technological advance required and this can take a few months to resolve, possibly including site visits and a detailed invoice and contract review. The claim may be adjusted as a result of the enquiry and, if there are obvious errors in what is claimed, there may be penalties. Patent Box Patent Box is a relief targeted at companies of all sizes seeking to exploit patented inventions and will allow them to apply a reduced rate of corporation tax to all profits relating to qualifying patent rights that are owned and used in the business. The potential tax savings can be significant, as 100% of all your product revenues are potentially included in the computation, irrespective of how large or small the actual patented component is compared to the size and cost of the overall product. (As at 2016 (going forward), the Government are revising the Patent Box rules to meet certain European Community objections) Patent Box relief is in addition to the R&D Tax Credit scheme, so companies can potentially benefit under both schemes. R&D Capital Allowances In addition to gaining relief on revenue expenditure via the R&D Tax Credits scheme, a company may be able to claim relief for capital expenditure on R&D by a capital allowance known as the Research and Development Allowance (RDA). This is a valuable relief allowing you to deduct 100% of your qualifying captial expenditure from taxable profits straight away, rather than over a number of years (as is the case for non R&D expenditure). When tax rates are falling this can result in a real tax saving by reducing your profits when the tax rates are higher, as well as creating a timing advantage as tax payment is deferred. The RDA is only of value to companies who are in a tax paying position. P9

10 The Specialist Approach It is possible for a company to prepare and submit its own claims. However, in order to be sure that their claim is optimised and justifiable, the company must fully understand how to apply the Guidelines defining qualifying R&D, and the legislation defining the qualifying expenditure. They would then need to divert technical and financial staff from their principal responsibilities to commit the necessary resources to prepare and document the claim. This can be very time consuming for non specialists, and the anxiety as to whether their understanding is correct, often leads to significant underclaims being made The alternative is to use a specialist like MSC R&D. A specialist approach uses skilled financial and technical experts, and places the projects and technologies at the centre of the claim. This approach starts with the company s technical people, talking to them in their own language, identifying all eligible projects and preparing robust claims. This need not be particularly time consuming because it is a conversation between your technical specialists and ours, so we can quickly grasp the nature of the development and advise where the qualifying R&D occurs. The extra knowledge and experience that a specialist possesses can help to uncover additional qualifying expenditure, which can be readily justified in terms of the R&D definitions, and which HMRC will be used to accepting. In our experience this can result in claims values being increased by up to 50%. R&D Tax Relief The MSC R&D Team Way Paid-on-Results; Fast-Track Process; Expert Teams MSC R&D has been successfully preparing claims for R&D Tax Relief since its inception in We have over 20 years experience in helping R&D technology companies deliver profitable growth through innovation. Our knowledge and experience of the R&D process is unrivalled, as is our expertise in raising funding and maximising available R&D tax relief for our clients. Our fast track blitz processes and methodologies minimise the impact on your time and obtain optimum results for you. Normally our analysts only require one day on site. Our team of MSC R&D accredited qualified technologists and financial experts have specific experience across a wide range of sectors, meaning we can match the right technical expertise to your business and work with your technical people and accountant to achieve the maximum eligible benefit from R&D Tax Relief. To support our claims, our in-depth analysis is compiled into a detailed report with an appropriate breakdown of your R&D expenditure. This report not only provides concrete evidence for your claim, but also acts as a valuable resource for project managers, directors and shareholders alike. Our clients often find that our objective, expert evaluation and our broader experience in supporting technology SMEs, can fundamentally change the way they look at and approach their R&D strategy. P10

11 Our service is generally offered on a contingency basis, providing peace of mind for our clients.this means that any benefits should be self funding As the policies on R&D Tax Credits inevitably change, it s important that we work with you on an ongoing basis to ensure that all future claims are within guidelines and claimed to their full potential. We want to help clients avoid enquiries while fully claiming their entitlement. So our aim at MSC R&D is to structure the claim so that HMRC can quickly see that the claim is prepared in accordance with the rule base, and that the R&D has been correctly identified by specialists in the technology field.. In that way we aim to secure quick agreement of the claim and get you the benefit straight away. Also, by involving us, you can demonstrate to HMRC that you have tried doing things conscientiously, and in the event of any challenge we will be there to smooth the way and support you. How Do I Get started? If you think you may be missing out on R&D Tax Relief, then please contact us either via our web site enquiry form or call us on We will then conduct a brief Pre-Qualification analysis with you to confirm your eligibility, followed by an initial meeting with one of our experts to explain our Fast-Track, Paid-on-Results Process to you. Examples of Eligible R&D Projects R&D Tax Relief applies to a huge range of industries and projects. The following examples highlight the diversity of projects that can qualify. Company - Advanced Precision Surface Engineering Project: Cyanide Resistant High Performance Lacquers The purpose of this project was to develop new lacquers that were particularly resistant to heavy cyanide compounds. The lacquers were used to shield unplated areas during aerospace manufacture, but existing lacquers were being attacked by cyanide used in the process P11

12 Company - Automated Liquid Filling and Capping Systems Project: System F filling system Over time, and to meet specific customer demands, the container filling machinery manufactured by the company had become over complicated and hard to clean and modify at the speeds required. The objective of the R&D project was to produce a much simpler design that was cheaper to manufacture, easier to strip and clean, easier to clean in place, and which could achieve a fast changeover time from one product to another. In addition, it represented a new technical approach that would provide a much wider range of filling capabilities without requiring significant modification or re-working. Company - Fire Detection and Alarm Control Panels Project: EN54 Compliant Man Machine Interface The purpose of this project was to create an intelligent Man Machine Interface that was capable of taking full advantage of modern microcontroller technology and yet could still conform, in an effective and safe manner, to the historical legislative standards. Company - Fire Prevention Systems Project: Fire Sentry Fire Prevention System By combining three different physical measurements, heat, smoke and combustion gases, together with a sophisticated geographic and timed trend analysis, it is possible to establish a detectable prefire Signature. The Fire Sentry system project was based upon a powerful processing and analysis control unit connected to different sensor types in multiple locations. By bringing all the various sensor data together and comparing the combined data to a database of known early stage fire signatures an early stage amber warning that a fire was developing could be issued to the control centre.. Company Atomising Technology Project: Master Alloy UHP Atomisation (RD135) The purpose was to investigate whether supersonic water flow could be used to produce Master Alloy powders. Master Alloy powders are a technology for producing very high performance materials by mixing bulk soft coarse metal powder, which is cheap, with the ultra-fine metal powders which are more expensive, before annealing and sintering the resulting component to fuse the material together into the final alloy. Company - Advanced Coupling & Gearbox Designs Project: Military Vibration Damping Coupling The company was approached by a client who were having major problems with the development of a new military vehicle. The requirements included the ability to be able to decouple, without tools, the auxiliary hydraulic drive so as to be able to remove the engine unit for maintenance. Problems were also being encountered with the generator drive in terms of achieving a high degree of vibration insulation. The purpose of this project therefore was to produce a suitable design that was capable of satisfying both these technical requirements. P12

13 Company - Cheese Packing Project: Vacuum Filled Flavoured Cheese This project addressed how to use a vacuum filling process to flavour cheese after it has been manufactured as opposed to the more traditional way of flavouring it during manufacture. The drivers for this were cost, the desire to be able to flavour cheese in smaller quantities and the ability to mould the cheese to shapes other than the traditional blocks or wheels.. Company - Educational Data Analysis (Non-Profit) Project: New Data Analysis System for Pupil Data The decision was taken to create a completely new package and re-write the application from the ground up, as this would ultimately give the system flexibility and extensibility, remove any inherent limitations of re-developing an older design and make it more adaptable in future. The decision to completely re-engineer the service from the ground up enabled the company to develop a dynamic and interactive software as a service model Company - Accountancy Practice Management Software Project: Browser Based Practice Management All the existing software functionality that had been developed by the company was based around an architecture that required the use of Windows workstations to process information and present it to the user. This has its limitations in that it is necessary to be able to install, and update the software on all the customers computers. Browser technology provides a potential method of removing this restriction, but it is a far more complex development environment and represents a major challenge. This project was launched to research the tools available, investigate the impact on the existing application structures and algorithms, and seek to develop a new architecture that could be accessed from a standard web browser, rather than a Windows workstation. Disclaimer 1. Please note that this guide is intended as general guidance only and does NOT constitute accountancy, tax or other professional advice. MSC R&D Ltd cannot accept any responsibility or liability for loss which may arise from the use of information within this guide. 2. Tax legislation, the law and practices by government and regulatory authorities (e.g. HMRC) are constantly changing. MSC R&D Ltd therefore recommend that for accountancy, tax or other professional advice, a suitably qualified professional advisor is consulted. 3. This guide covers UK taxation only. Addressing all foreign tax implications is beyond the scope of this guide. P13

14 Delivering Profitable Innovation THE MSC R&D INTEGRATED, FAST-TRACK, PAID-ON-RESULTS TEAM WAY Underpinning the work MSC R&D does for its clients is the MSC R&D Team Way - an approach based on a number of core principles: Partnership Approach - Long Term Benefits Expert Teams - Quality Results The Fast-Track Blitz - Reduced Timescales & Minimal Disruption Paid-on-Results - Reduced Risk MSC R&D S STRATEGIC, INTEGRATED R&D FUNDING & BUSINESS GROWTH SERVICES INCLUDE: R&D Strategic Services R&D Funding - R&D Tax Relief - UK & European R&D Grant Funding - Finance Brokerage R&D Commercialisation Tel: Sheffield London Oxford Brussels New York Toronto