R&D Tax Credits How to benefit from the latest initiative

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1 R&D Tax Credits How to benefit from the latest initiative Yung Tran, Head of Member Services and Business Improvement, SMMT Robert Baker, Chief Economist, SMMT Diarmuid MacDougall, Partner, PwC 18 April 2013 SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the S symbol and the Driving the motor industry brandline are trademarks of SMMT Ltd

2 During presentations (10:30 11:00) everyone will be muted so that only the presenters will be heard. The presentation will be followed by a Q&A session. Click on the hand symbol to show that you have a question. If you are experiencing any technical problems please call or SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 2

3 Robert Baker Chief Economist SMMT SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 3

4 UK Budget 2013 banking on firmer GDP growth ahead It wasn t planned to be this way rewind to Budget 2008 Recovery drags; fiscal consolidation relaxed and rejigged Public finances weaker than expected at June 2010; so higher borrowing, for longer and spending shifted around SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the S symbol and the Driving the motor industry brandline are trademarks of SMMT Ltd

5 On the UK s Budget plans 2008 and 2013 (1) Budget 2008 Budget 2013 Budget 2013 bn 2012/13F 2012/13P 2016/17F Current Receipts Current Spending Current Balance 18 (93) (35) Net Investment 41 28* 32* Public Sector Net Borrowing (23) (121)* (67)* Cash Value UK GDP 1,841 1,526 1,806 Gross Stock Public Debt 731 1,189 1,580 * Adjusted for capital receipts from Royal Mail, APF & 4G which reduce net investment to -6bn in 2012/13 SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 5

6 On the UK s Budget plans 2008 and 2013 (2) Budget 2008 Budget 2013 Budget 2013 as a percentage of UK GDP 2012/13F 2012/13P 2016/17F Current Balance 1.0% (6.1%) (1.9%) Public Sector Net Borrowing 1.2% 7.9% 3.7% Gross Stock Public Debt 39.7% 77.9% 87.5% The UK & Europe public finances deficits and debt 2013 General Government as percent of GDP UK Germany Euro Zone net borrowing 7.6% 0.2% 2.8% net debt 93.9% 80.7% 95.1% Maastricht Treaty deficit and debt basis Mar 2013 OBR EFO SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 6

7 Fiscal consolidation by 2017/18 and fiscal priorities Planned tax rises 80% complete by 2012/13; 80% of cuts to day-to-day spending and 70% of benefits to come To date the key fiscal priorities under the Coalition are: 1 taking the Personal Tax Allowance to 10K in 2014/15 2 Corporation Tax rate 20% for all businesses 2015/16 3 Fuel Duty increases postponed & cancelled for now = IFS estimates the total cost to be 24bn by 2016/17 Rebalancing policies, like the reformed Large Firm R&D Tax Credit Regime are slow-burners; key incentives to aid economy-wide shift to investment & exports. In time this should work. But the immediate focus is on housing again with major aid guarantees in First & Help to Buy Schemes SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 7

8 R&D Credits Diarmuid MacDougall

9 Agenda What is R&D? R&D tax relief schemes Small & Medium sized Enterprises (SMEs) Large company scheme Capital expenditure Qualifying costs Claim Methods The new Above The Line R&D Expenditure Credit PwC Slide 9

10 What is qualifying R&D? PwC 18 April 2013 SMMT R&D Webinar Slide 10

11 What is qualifying R&D? R&D for tax purposes takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. The activities that directly contribute to achieving this advance through the resolution of scientific or technological uncertainty are R&D. When a product or process is introduced or changed and, for technological reasons, it is necessary to try it out to see if it worked then it is likely R&D has been performed. Overall knowledge can still be advanced where it is known that an advance has been achieved but the details of how are not readily available An advance may seek to extend the overall knowledge, duplicate an existing technology in a fundamentally different manner or make an appreciable improvement to an existing technology. An appreciable improvement should be more than minor or routine upgrading and should represent something that a competent professional user working in the field would consider to be genuine and non-trivial. PwC 18 April 2013 SMMT R&D Webinar Slide 11

12 What is qualifying R&D? Examples include: Efforts to design and make components to more demanding tolerances or to perform in more demanding conditions e.g. whether it is possible to machine at the higher tolerances within acceptable distortion levels caused by clamping forces and release, work with foundries to change casting methods etc. Technical challenge caused by design modification to rotate at faster rpm, withstand greater operating temperatures etc Design uncertainty caused by system impact of changes in dimensions, power, weight etc such as effect on design of crash zones in a vehicle, impact on seal performance caused by aerodynamic changes resulting in greater pressure differences over door/window areas etc Indications of uncertainty Need to model solution, build prototypes and perform substantial testing Failures, modifications, redesign an iterative design process Contingency/plan for technical risk PwC 18 April 2013 SMMT R&D Webinar Slide 12

13 R&D Tax Relief Schemes Strictly private and confidential PwC April 2013

14 Section 2 - Overview of R&D tax reliefs and Less than 500 employees What is a SME? either annual turnover 100m or balance sheet 86m There is a year of grace if these limits are breached Numbers include those of investors: 100% if investor controls company Proportion if between 25% and 50% investment (but certain investors disregarded VCs, universities, business angels, institutional investors) PwC Slide 14

15 Small or Medium Enterprises (SMEs) Unfunded / internal R&D Funded R&D Internal cost e.g. employees External cost e.g. payments to subcontractors Policy objective: to address difficulties in raising funds PwC Slide 15

16 SME: What is the benefit OR Reduced Taxable profit Surrenderable loss From April 2011 From April 2012 From April 2013 From April 2011 From April 2012 From April 2013 Qualifying R&D 1m 1m 1m Qualifying R&D 1m 1m 1m Extra 100%/125% 1m 1.25m 1.25m Extra 100%/125% 1m 1.25m 1.25m Tax saved on extra at 26%/24%/23% 260k 300k 287.5k Tax saved on R&D expenditure 26%/24%/23% 260k 240k 230k Total 520k 540k 517.5k Potential loss to surrender 2m 2.25m 2.25m Cash credit on surrendered loss * 12.5%/11% 250k 247.5k 247.5k PwC * Surrender is restricted to company PAYE & NI for periods ending on or before 31/3/12, unlimited thereafter Slide 16

17 Large company scheme Unfunded / internal R&D Funded R&D Internal cost e.g. employees External cost* e.g. payments to subcontractors *with limited exceptions (e.g. payments to universities) Policy objective - to increase investment in R&D to drive up productivity PwC Slide 17

18 Section 2 - Overview of R&D tax reliefs Large company scheme: What is the benefit? Currently c7% cash value but falling to 6% as Corporation Tax (CT) rate drops to 20%. Qualifying R&D 1m Extra 30% 300k The extra deduction will result in: Tax 23% (FY13) 69k Tax 20% (FY15) 60k forward indefinitely No ability to surrender losses for repayment PwC Slide 18

19 RDAs 100% tax depreciation (other than land). Covers expenditure both on carrying out R&D and on providing R&D facilities (e.g. buildings). Expenditure should be allocated to R&D activities on a just and reasonable basis, e.g. through a proportion of floor space or headcount. There is a two year time limit for claiming RDAs. PwC 18 April 2013 Slide 19

20 Which costs qualify for R&D relief? PwC 18 April 2013 SMMT R&D Webinar Slide 20

21 Section 2 - Overview of R&D tax reliefs What is qualifying expenditure? STAFFING COSTS The following costs qualify for staff involved in qualifying R&D activity Salaries, wages, bonuses etc Employer s Class 1 NIC Employer s payments to pension funds Reimbursed expenses But not Benefits, Class 1A, 1B NIC on benefits EXTERNALLY PROVIDED WORKERS In some instances payments to agencies/group employment companies for staff may qualify (please see below) CONSUMABLE OR TRANSFORMABLE MATERIALS Expenditure on materials and equipment used up in the R&D activity Power, water and software used in R&D But not Supplies used indirectly e.g. overheads, insurance etc Rent, rates, interest or lease payments Capital items or depreciation CONTRIBUTION TO INDEPENDENT R&D In some instances payments to qualifying bodies or contributions to independent R&D may qualify SUBCONTRACT SME 65% of subcontractor payments Large payments to qualifying bodies only (100%) PwC Slide 21

22 Calculation methods PwC 18 April 2013 SMMT R&D Webinar Slide 22

23 Weighted average project percentage Project Cost ( 000) R&D activity Qualifying cost ( 000) % % % % R&D% = 440 = 58.7% 750 Qualifying staff cost = 58.7% x staff cost PwC 18 April 2013 SMMT R&D Webinar Slide 23

24 Function area percentages % qualifying activities Departments AE BE CE DE EE HY PT Testing New models 80% 95% 54% 95% Significant upgrades 50% 100% 30% 100% Minor upgrades 60% 100% 10% 100% Other 75% 95% 40% 100% Overall function % 95% 20% 100% 100% R&D Tax Relief 24 April 2012 PwC

25 Population average R&D content Spend m claim Total spend Average R&D % 40% 60% 80% Qualifying Spend R&D % 18 April 2013 SMMT R&D Webinar PwC Slide 25

26 The New R&D Expenditure Credit ( RDEC ) PwC 18 April 2013 SMMT R&D Webinar Slide 26

Overview of the new R&D Expenditure Credit A new 10% R&D credit (RDEC) is available on expenditure incurred from 1 April 2013. It is taxable, so generates an 8% cash saving.

27 Overview of the new R&D Expenditure Credit A new 10% R&D credit (RDEC) is available on expenditure incurred from 1 April It is taxable, so generates an 8% cash saving. It is like a grant, reducing the cost of R&D, unlike the current scheme which is tax. As R&D budget holders get the benefit in the numbers they are responsible for it should have more effect on investment decisions. It is given to large companies and SMEs claiming under the large company scheme. Companies initially have the option to elect for the RDEC or continue to claim the current super-deduction. For periods beginning on or after 1 April 2016, the super-deduction scheme is withdrawn and only the RDEC is available. PwC 18 April 2013 SMMT R&D Webinar Slide 27

28 Overview of the new RDEC 10m R&D spend Super Deduction 000 RDEC 000 RDEC Losses b/f P&L Profit before tax (PBT) 15,000 16,000 16,000 Tax charge (see below) (2,400) (3,200) - 12,600 12,800 16,000 Tax Computation PBT 15,000 16,000 16,000 R&D deduction/losses b/f (3,000) - (16,000) Taxable profit 12,000 16,000 - Tax charge at 20% tax rate 2,400 3,200 - Balance Sheet Tax Payable 2,400 3,200 - R&D Credit (less withholding) (1,000) (800) 2,200 (800) PwC 18 April 2013 SMMT R&D Webinar Slide 28

29 RDEC issues There is now a rate differential between the current super deduction (effective 6% cash tax benefit) and the RDEC (effective 8% cash tax benefit). However, for contracts which are priced based on cost, there is a risk that the credit will be clawed back, as the RDEC effectively reduces the cost of carrying out R&D work. Consideration of timing for electing into RDEC pre-april It is possible to elect into the RDEC within two years, however the impact on the figures included in the accounts should be considered. Once the election is made it is not possible to return to the superdeduction scheme. Transfer pricing arrangements may need to be amended. Thought should be given to whether the credit reduces the cost of R&D which is recharged (and whether the cost marked up is net or gross of the credit). Impact on company bonuses (if determined by PBT) etc. Impact on effective tax rate and foreign tax credit available in parent territory for subsidiaries of foreign multinationals. PwC 18 April 2013 SMMT R&D Webinar Slide 29

30 Thank you. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Alternatively, you can type your question. Email: memberservices@smmt.co.

31 Questions and Answers Please click on the hand symbol to raise your hand if you have a question. Please ensure that you are connected to the audio to ask a question. Alternatively, you can type your question. memberservices@smmt.co.uk with your questions after this session. Slides ed to participants after this session SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 31

Innovation Incentives R&D Relief

www.pwc.co.uk Innovation Incentives R&D Relief Section 2 - Overview of R&D tax reliefs Introductions Who are we? James Geldart Senior Manager 07772 966342 Amy Lord Manager 07525 280680 Hayley Cowsill Senior