Research & Development Enhanced Credit (RDEC)

Transcription

1 Research & Development Enhanced Credit (RDEC) March 2015

2 INTRODUCTION The RDEC (originally known as Above the Line or ATL ) scheme was announced by the Government in the 2011 Autumn Statement. It was designed to increase the visibility and certainty of R&D tax relief (hence the original ATL designation) and provide greater financial and cash flow support to companies with no Corporation Tax (CT) liability. The RDEC scheme is available for expenditure incurred on or after 1 April 2013, to give large companies, and some SMEs (typically for instance, where their R&D project has received a notified state aid that has pushed them into the Large Company scheme) the option to take advantage of the RDEC instead of the current enhanced deduction provisions (the 30% enhancement available under the current Large Company scheme). It was originally estimated that the cost to the Exchequer would be in the region of 200 million annually. However, the scheme has subsequently proved very attractive, and the annual cost has recently been increased to an estimate of 400 million. HMRC recently produced guidance on the RDEC scheme and detailed information can be found in the Corporate Intangibles and Research & Development manual (CIRD) at CIRD89700 et seq. An important update in the 2014 Autumn Statement was to increase the credit from 10 to 11%, from 1 April Fully understanding the affects may allow the company to make significant savings. These complexities of the interaction of the two should be carefully considered. Which is best in the transitional period - Enhanced Deduction or RDEC? Each case on its merits, but: For a new claimant, RDEC most probably as it will be mandatory from 1 April However, there is probably only a marginal difference in favour of RDEC and it may depend on the company s record keeping. For a company with substantial losses - the cash option of the RDEC could be very attractive. For a profitable company with a CT liability - the RDEC provides increased visibility of Earnings Before Interest, Taxation, Depreciation & Amortisation (EBITDA), but there is the convenience factor of existing methodologies. For a short-term loss maker (e.g. loss year 1, profit year 2) - there is the convenience of the existing provisions versus the potential cash flow advantages of the RDEC (but don t forget that once RDEC is claimed, its irrevocable). Example of Enhanced Deduction Relief v RDEC A profitable large company: NO CLAIM ENHANCED DEDUCTION RDEC Turnover 10,000 10,000 10,000 COMMENCEMENT AND TRANSITIONAL PROVISIONS The RDEC was introduced alongside the current scheme, from 1 April Expenditure from 1 April 2013 can receive relief via the RDEC scheme. It will fully replace the current Large Company scheme from 1 April Once RDEC has been claimed on a company return it is treated as an election and is irrevocable. Any election is subject to the same time limits as all the current provisions (e.g. it must be made within two years of the end of the accounting period). When does an SME have to make a full or partial claim under one of the Large Company schemes? Most commonly where a company has received a grant or subsidy in relation to an R&D project. A company should consider the impact that grant funding, or a subsidy, may have on the amount of its R&D tax credit claim, preferably before receiving it. R&D 2,000 2,000 2,000 Other 2,000 2,000 2,000 Profit 6,000 6,000 6,000 (of R&D Exp) 200 Enhanced Deduction (x130%) 600 Taxable Profit 6,000 5,400 6,200 Corporation Tax 1,260 1,134 1,302 RDEC from HMRC 200 Tax Payable 1,260 1,134 1,102 In the above example, the large company is better off claiming RDEC compared to claiming the enhanced deduction. The saving will increase as the main rate of corporation tax falls. Note however, that the company has an increased liability to CT for the period. This should be remembered, as the CT may become due before a RDEC claim is made, so cash flow issues may arise. RDEC cash benefit is 200,000 x 21% divided by 2,000,000 = 2.1%. 10% credit 2.1% equals 7.9% of R&D expenditure. PAGE 02

3 RDEC AMOUNT The amount of the RDEC is the total of the qualifying R&D expenditure incurred in the accounting period, multiplied by the relevant percentage, currently 10%, but increasing to 11% from 1 April The RDEC offsets the R&D cost above the operating profit line at the 10% (11%) rate. That is, it will increase operating profits by 10% (11%) of the eligible costs. The credit is taxable and assuming a CT rate of 21%, the cash benefit is 7.9%. Therefore, for a business that is loss making, a cash credit of 7.9p (8.8p from 1 April 2015) per 1 spent on R&D is available. The main rate of CT will reduce to 20% from 1 April The cash credit is limited to the PAYE & NIC liabilities of the company s staff engaged on R&D activities, both directly and indirectly, but there is no restriction for the percentage of time spent on R&D. Additionally, connected group company externally provided workers (EPW s) liabilities can be included, although this would be restricted to the percentage of time they spend on R&D for the claimant company. HOW DOES RDEC WORK? A key feature of the RDEC is that it is a taxable receipt and it will be paid net of tax to companies with no CT liability. This makes it more attractive for loss making companies than the Large Company scheme (with its 30% enhanced deduction). Under the current provisions, a loss-making company would simply have a bigger loss to carry forward whereas under the RDEC scheme, the company receives a payable tax credit. Note that the RDEC is taxable at the main rate for CT. Detailed legislation can be found at Section 104A, CTA 2009 and HMRC s guidance in the Corporate Intangibles and Research & Development Manual (CIRD) onwards. The examples below show how the RDEC scheme works in the following four scenarios: i) A large profitable company Turnover 16.6m Total Income 17.6m TOTAL: CT Profit 2.6m CT Chargeable 546, ,000 Calculated as 1m less 546,000 The 454,000 is the amount of the payable RDEC remaining after discharging the CT liability for the period. Note that if different figures are used, we may need to consider steps 2-7, as per HMRC guidance at CIRD ii) Loss making company in receipt of RDEC Turnover 6m Total Income 7m Total Expenditure 15m CT Loss CT Due ( 8m) Nil RDEC remaining 1m However, the amount repayable is 790,000 (unless, for instance, the credit is further restricted by the PAYE cap) as we need to move to Step 2 of the calculation, to ensure that loss makers receive the same net benefit as profit makers (the credit being taxable). This is achieved by retaining a notional tax e.g. 21% main rate in this example, so; = 210,000 then 1m- 210,000 = 790,000. The 210,000 is carried forward to reduce the CT liability of a later period, or can be surrendered to another group company. PAGE 03

4 iii) Profit making company, but RDEC exceeds CT Liability Turnover 15m Total Income 16m YEAR 02 Turnover 30m 2m Total Income 32m R&D 20m Other TOTAL CT Profit 2.5m 12.5m 3.5m Total 25m Profit 7m CT 1,470,000 CT Liability 735, ,000 1m less 735,000 Without added complications e.g. PAYE Cap, later CT liability becoming due, the repayable RDEC is 265,000. iv) Loss making company year 1, profit making in year 2 YEAR 01 RDEC b/f Year 1 315,000 RDEC Year 2 2m 845,000 Assuming no other complications e.g. PAYE Cap, Further CT liability becoming due, the payable RDEC in year 2 is 845,000, calculated as 2m+ 315,000-1,470,000. Turnover 9m Total Income 1.5m 10.5m R&D 15m Total 20m Loss No CT liability so remaining RDEC is ( 9.5m) 1.5m Here, we need to move to Step 2, that is the lesser of the remaining RDEC of 1.5m and = 315,000. This equals 1.5m- 315,000 = 1,185,000. Assuming there are no added complications, e.g. PAYE Cap, PAYE arrears, further CT liability for another period, the amount payable to the company is 1,185,000. The 315,000 restricted above is carried forward to set against CT liability in year 2. UTILISING RDEC Loss making, and even profit-making companies, may be eligible for a payable RDEC, subject to a number of conditions. The legislation at s104n, CTA 2009, (or CIRD89780) sets out a number of prescribed steps, (typically called the seven steps ) but in general, the payable credit is: Capped at the amount of payroll costs incurred by the company s R&D workers (with no restriction for the percentage of time spent on R&D activities) plus payroll costs of another group company s externally provided workers (but restricted to the percentage of time they spend on R&D activities). Paid after effectively deducting CT at the main rate. Offset against any outstanding PAYE/NI, (per Real Time Information - RTI), VAT & CT liabilities (that were due, or subsequently have become due). HMRC will check for arrears when a claim is received. Adjusted for amounts surrendered to other group companies. Only paid if the company is a going concern at the time of the claim. PAGE 04

5 RDEC BENEFITS FOR LOSS MAKING COMPANIES The Large Company scheme R&D provisions gave an additional deduction from taxable profits but no immediate value unless the company, or a group associate, had a UK CT liability. An RDEC can generate a cash repayment, irrespective of profit or loss, subject to a number of conditions discussed above and therefore assists cash flow at crucial times for the business. It may also improve EBITDA, as it is included in the Profit & Loss (P&L) account, allowing better visibility of R&D activities, and it may also improve funding for R&D budget holders, leading to more R&D being affordable and leading to increased profits. If your company has significant arrears of PAYE, VAT etc, it can assist in avoiding HMRC Debt Management seeking winding-up orders etc. INTERACTION WITH THE PATENT BOX Companies can benefit under both this and the RDEC regime at the same time (subject to the various conditions and restrictions applying in HMRC legislation & guidance being applied). Careful consideration and analysis is generally necessary, to ensure your company maximises the various incentives and reliefs available. HOW CAN ForrestBrown ASSIST? At least until 1 April 2016, there is now a choice for companies claiming additional tax relief under a Large Company scheme. However, bear in mind that if you make an RDEC claim before then, it counts as an irrevocable election and your company will only be left with one choice! Generally, there are very clear benefits associated with an RDEC claim, but it can bring extra complexity. Careful consideration needs to be given when looking at the enhanced deduction versus the RDEC position, as well as for companies that potentially qualify for claims under both the SME and Large Company Schemes. ForrestBrown can assist with all your R&D queries & processes. We can help you: Consider which regime most appropriate Prepare R&D claims and deal with HMRC Review claims and help optimise them Help improve data capture and analysis processes Please contact us for further information SIMON BROWN MALCOLM HENDERSON Please Note: We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. PAGE 05