Guide to R&D Tax Benefits for Large Companies

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Guide to R&D Tax Beefits for Large Compaies This

should obtai professioal advice specific to your ow

result of ay of the iformatio cotaied withi it.

1 Guide to R&D Tax Beefits for Large Compaies This publicatio has bee prepared as a guide oly ad you should obtai professioal advice specific to your ow circumstaces before actig or refraiig from actig as a result of ay of the iformatio cotaied withi it. Copyright Proovotech Limited. All rights reserved. Issue 8 - Jauary 2016.

Guide to R&D Tax Beefits for Large Compaies A overview of the R&D Expediture Credit for large compaies This brief guide gives a overview of the Govermet's R&D Expediture Credit (RDEC) scheme as it

It describes: what is meat by a 'Large Compay'; the level of credit offered; the criteria used to determie the eligibility of R&D projects; the categories of qualifyig expediture; ad the process of

2 Guide to R&D Tax Beefits for Large Compaies A overview of the R&D Expediture Credit for large compaies This brief guide gives a overview of the Govermet's R&D Expediture Credit (RDEC) scheme as it applies to large compaies. It describes: what is meat by a 'Large Compay'; the level of credit offered; the criteria used to determie the eligibility of R&D projects; the categories of qualifyig expediture; ad the process of submittig a claim. By so doig, we hope that the documet provides a useful itroductio to the scheme. It must be remembered, however, that i may cases the combiatio of the techical justificatio ad the tax situatio ca become complex ad we recommed that detailed advice be sought prior to the preparatio of ay claim for credit uder the scheme. The scheme was itroduced o 1 April 2013 but as the previous R&D tax relief scheme is still available up to 31 March 2016, this guide explais both. Which compaies ca beefit from RDEC? Compaies able to make a claim for RDEC as large compaies are those that exceed the scale limits set dow i the Europea Commissio's defiitio of a Small to Medium-sized Eterprise (SME). The defiitio requires the compay, together with certai related eterprises such as compaies i the same group, to have fewer tha 500 employees ad either aual turover ot exceedig 100m or aual total balace sheet assets ot exceedig 86m. The defiitio of SME provides exemptios, i some circumstaces, from the iclusio of data associated with certai types of ivestor compaies, icludig uiversities. Although, i geeral, the beefits available uder the RDEC scheme are ot as geerous as those uder the R&D tax relief scheme for SMEs, they are still sigificat ad a importat source of additioal fudig for iovative projects. What beefits are available? R&D tax relief scheme - The R&D tax relief scheme for large compaies, uder which beefits ca be claimed util 31 March 2016, provides a additioal 30% deductio (kow as a "superdeductio") from taxable profits for qualifyig expediture icurred o a eligible R&D project, over ad above the ormal tax deductio available. '...the combiatio of the techical justificatio ad the tax situatio ca become complex... we recommed that detailed advice be sought prior to the preparatio of ay claim for relief uder the scheme.' For example, if a compay has 200,000 of qualifyig expediture it will be able to deduct the 200,000 from its taxable icome uder usual tax priciples, with the curret R&D tax relief ehacemet the givig a additioal 60,000 deductio. Page 2

3 Guide to R&D Tax Beefits for Large Compaies If the compay pays corporatio tax at 20% the additioal ehacemet will therefore geerate a tax beefit of 12,000, reflected i a reductio i the compay's aual corporatio tax bill. It is possible to reflect the effect of the relief i a compay's quarterly corporatio tax istalmets i the same way as other computatioal adjustmets. RDEC scheme the RDEC scheme applyig from 1 April 2013 operates i a completely differet way to the previous tax relief, although both the defiitio of R&D ad the rage of qualifyig expediture used are exactly the same as uder the previous scheme. The ew regime does ot feature ay superdeductio. Istead, it is essetially a grat - a payable, taxable sum, set at 11% (10% before 1 April 2015) of the expediture, that must be icluded i a compay's taxable profits. For the majority of compaies, with a corporatio tax liability for the period, HMRC will simply deduct the RDEC from ay tax owig. So, for example for a compay that has spet 1m o qualifyig R&D the RDEC will be 110,000 ad will be icluded i its taxable profits. Because of this, tax will be due o the RDEC itself, therefore at a tax rate of 20% the et beefit will be 88,000 or 8.8% of the actual expediture, eve though the credit set off agaist the overall tax bill will still be 110,000. If there is isufficiet corporatio tax liability to absorb the RDEC i full, or eve o liability at all due to losses, the RDEC, et of otioal corporatio tax, ca potetially be used i other ways, after beig capped at the level of the compay's PAYE ad NIC for R&D staff i the year. If there is o other outstadig corporatio tax owig to HMRC for other periods it ca be surredered to aother compay i the same group to offset its ow tax liability; if that is ot possible it ca the discharge ay other taxes owed to HMRC. Fially, if oe are owed the the RDEC is payable i cash to the compay, provided it is a goig cocer. The cash paymet facility marks a major distictio with the old R&D tax relief scheme, where o cash credit was available at all for large compaies. Because this characterises the beefit more like a grat, the ew scheme is ofte referred to as a above-thelie (ATL) credit sice accoutig rules permit the bookig of the credit i the pre-tax profit or loss. Although the ew RDEC applies from 1 April 2013, a compay has the optio to claim uder the old scheme util 1 April What activities are eligible? Judgig the eligibility of projects agaist the defiitio of R&D ad esurig that all eligible work is icluded are usually the aspects of the claim process that compaies fid most difficult. The geeral priciple is that a activity will qualify as R&D for tax purposes if it would be treated as R&D uder ormal accoutig practice ad meets the defiitio set out i Guidelies issued by the DTI. The fact that a compay has ot actually disclosed its expediture o R&D withi its accouts eed ot, however, prevet it from qualifyig. Of course, a key pre-requisite is that there is i fact a activity i a field of sciece or techology - "research" or "developmet" i other areas such as social scieces, as well as iovatio i purely a commercial sese, do ot qualify. However the Guidelies are eutral as regards differet fields of sciece or techology, givig, at least i theory, a level playig field, whether a project is i aotechology, life scieces, egieerig or software. I practice the DTI Guidelies usually form the sole basis for assessmet of eligibility by HMRC ad they should be cosidered i full whe makig a claim. I summary, the Guidelies state that a eligible R&D project is oe that meets two key criteria: (1) It must be seekig to achieve a advace i sciece or techology This requires that the work is aimed at icreasig the overall kowledge or capability i a field of sciece or techology. It may have a tagible outcome, such as a ew or appreciably improved product or process, or more itagible cosequeces, such as ew kowledge aloe. Catchig up with the idustry geerally is ot regarded as a advace, although attemptig to replicate a advace that has already bee made elsewhere, but where the solutio is ot i the public domai, ca qualify. (2) It must seek to resolve scietific or techological ucertaity Ucertaity exists whe kowledge of whether somethig is scietifically possible or techologically feasible, or how to achieve a desired result i practice, is ot readily available or deducible by a competet professioal workig i the field. This icludes system ucertaity, where the compoets i a complex system might be well-kow ad established i themselves but where their itegratio gives rise to scietific or techological ucertaities It is importat to be able to show that the project is carried out as a systematic process of experimetatio ad that staff with the appropriate techical qualificatios - i.e. who are themselves competet professioals workig i the field - are egaged i the work. However, a key poit is that success i achievig the techical goals is ot essetial - it is the attempt ad the way i which the work was coducted that couts. I fact, sice failure is frequetly idicative of techical challeges ad a departure from the routie, usuccessful projects are ofte good cadidates for a R&D claim. Page 3

Guide to R&D Tax Beefits for Large Compaies What expediture qualifies?

Qualifyig expediture for large compaies, which must be reveue i ature, comprises the followig: staff costs of employees directly ad actively egaged i R&D, comprisig salaries, bouses, employer's NICs

it is possible for the separate activities to lose their character as R&D.

4 Guide to R&D Tax Beefits for Large Compaies What expediture qualifies? Oce it has bee established that the compay carries out eligible activities, the ext stage is to idetify the associated qualifyig expediture to iclude i a claim. Qualifyig expediture for large compaies, which must be reveue i ature, comprises the followig: staff costs of employees directly ad actively egaged i R&D, comprisig salaries, bouses, employer's NICs ad employer's pesio cotributios icludig cotributios paid uder approved pesio schemes i the EU ad EEA; Where groups of compaies split out the separate elemets of the R&D project ito differet compaies, it is possible for the separate activities to lose their character as R&D. For example a compay might provide testig services that could be routie i ature for that compay, eve though the testig is eeded to cofirm whether the project has met its techical objectives. The relief for large compaies alleviates this problem by deemig such a activity as a R&D project for the testig compay, if it would have bee eligible if performed by the payig compay as part of its R&D project. expediture o cosumable or trasformable items, i.e. materials used up durig the R&D process ad ot reflected i the fial product or sold to ay third party. This category will ormally iclude expediture o prototypes but specifically icludes water, fuel ad power, as well as software; paymets made for exterally provided workers, i.e. staff provided by agecies or other third parties who work o R&D projects uder the supervisio, directio or cotrol of the claimat compay; paymets for R&D subcotracted to idividuals, parterships of idividuals, or "qualifyig bodies" - charities, istitutios of higher educatio such as a uiversity, a scietific research orgaisatio or a health service body; What other coditios apply? The R&D must be relevat to the compay's existig trade or to a trade that the compay is itedig to carry out. The expediture must ot be capital i ature. However expediture that is reveue for tax purposes but put to a balace sheet accout is also capable of qualifyig. Expediture that is recorded o the balace sheet as part of the cost of a itagible asset ca qualify whe icurred.. Note that i some istaces, expediture may be properly treated as reveue i the accouts but may still be capital for tax purposes. This ca ofte be a complex area ad should be cosidered carefully. cotributios to fud R&D carried o by qualifyig bodies listed above; the cost of payig cliical trial voluteers. Normally oly 65% of paymets for exterally provided workers qualifies. However if the provider of the exterally provided workers is coected to the payig compay, for example they are uder commo cotrol or are i a group, the the qualifyig expediture is the lower of the actual paymet made or the qualifyig staff costs icurred by the provider itself. Where both parties are ucoected the claimat compay ad the provider ca make a irrevocable electio for the same treatmet as coected parties. A separate relief is available for R&D expediture that is actually capital for tax purposes, givig a 100% deductio i the year of expediture i place of the more usual capital allowaces that are give over several years. This ca iclude expediture o buildigs ad such claims ca therefore result i a absolute tax savig sice buildigs do ot ofte qualify for ay allowaces otherwise, especially give the phasig out of Idustrial Buildigs Allowaces. R&D that has bee cotracted to the compay ad paid for by a third party still qualifies, as log as the payer is either a large compay itself or a etity ot chargeable to UK tax o its trade profits. The purpose of this measure is to avoid claims by more tha oe UK compay for effectively the same expediture, sice uder the R&D tax relief scheme for SME compaies paymets made to subcotractors qualify from their perspective. Page 4

5 Guide to R&D Tax Beefits for Large Compaies How is a claim made? A claim for RDEC is made i the compay's aual corporatio tax retur (CT600). The ultimate deadlie is two years from the ed of the accoutig period. Although the statutory filig requiremets are miimal, it is best practice to submit details of the claim with the retur. Although HM Reveue & Customs has specialist staff dealig with R&D claims, icludig a etwork of specialist offices dealig with R&D tax relief claims for compaies ot dealt with i the Large Busiess Service, it does ot employ scietists or techologists to review claims. This meas that it is essetial that the project iformatio is carefully preseted i order to be uderstadable to a lay perso, while still techical i ature. The ispector has the power to equire ito the claim ad to withhold repaymet of tax util the equiry is complete. The most commo reasos for makig a equiry iclude: requirig further evidece that he project meets the criteria to be treated as R&D; cocers that icorrect categories of expediture have bee claimed. I the past, equiries were ormally coducted by correspodece although today it is more usual for the Ispector to request a face-to-face meetig with the compay's techical staff, which ofte proves a more effective way to aswer his or her queries ad secure agreemet. How do I get further iformatio? For further iformatio o makig a R&D tax relief claim, please speak to your usual cotact at Proovotech or us at ifo@proovotech.com. About Proovotech Proovotech specialises i the implemetatio of the govermet's scheme of tax icetives for research ad developmet (R&D) work, helpig techology compaies to claim their etitlemet to this importat beefit. Our approach combies the techical ad tax expertise required for this very specialised aspect of the tax system; our services rage from support for specific aspects of the claim process, workig with your accoutig or tax advisory firm, to maagemet of the etire claim lifecycle, icludig liaiso with the HMRC ispectors. Our aim is to: Reduce the overall cost of the claim process for you; Esure that all of your eligible work is icluded; Speed up the process ad acceptace of your claim by HMRC; Maximise the probability of success. We also trasfer the kowledge required for future claims to be maaged largely i-house. Whether you are already familiar with the process ad claimig successfully, have a specific issue with a claim or have ot yet cosidered your eligibility for the beefit, we would be delighted to see if we ca help you. '...it is essetial that the project iformatio is carefully preseted i order to be uderstadable to a lay perso, while still techical i ature.' Proovotech Limited St Joh's Iovatio Cetre Cowley Road Cambridge CB4 0WS Tel: +44 (0) Fax: +44 (0) ifo@proovotech.com

STRAND: FINANCE. Unit 3 Loans and Mortgages TEXT. Contents. Section. 3.1 Annual Percentage Rate (APR) 3.2 APR for Repayment of Loans

STRAND: FINANCE. Unit 3 Loans and Mortgages TEXT. Contents. Section. 3.1 Annual Percentage Rate (APR) 3.2 APR for Repayment of Loans CMM Subject Support Strad: FINANCE Uit 3 Loas ad Mortgages: Text m e p STRAND: FINANCE Uit 3 Loas ad Mortgages TEXT Cotets Sectio 3.1 Aual Percetage Rate (APR) 3.2 APR for Repaymet of Loas 3.3 Credit Purchases