Research & Development Tax Reliefs Tracey Bentham & Denise Roberts 8 July 2003

Research & Development Tax Reliefs Tracey Bentham & Denise Roberts 8 July 2003

R&D Tax ReliefsIntroduction • Reliefs available • Small company relief rules • Qualifying R&D • Qualifying expenditure • Sub-contract R&D • Claims and documentation • Action Points

R&D Tax Reliefs Reliefs available • R&D Allowances • R&D Relief for qualifying expenditure incurred by small companies (SMEs) after 1 April 2000 • R&D Relief for qualifying expenditure incurred by large companies after 1 April 2002 • Vaccines Research Relief (VRR) for costs of research into drugs and medicines for “killer diseases” (TB, Malaria & Aids) expenditure after 22 April 2003.

R&D Tax Reliefs R&D allowances • 100 % tax depreciation on capital expenditure on research assets • This has been in place for a number of years previously called Scientific Research Allowances • Is available to all companies

R&D Tax Reliefs Small & Medium sized Enterprises (SMEs) • SME relief was the first new incentive introduced and has driven the large companies relief. • An SME is a company that has: • less than 250 employees • Not have 25% or more of its share capital or voting rights owned by non SME’s unless they are VC’s or equivalent. And either • turnover  €40 million (c £25 million),or • balance sheet total  €27 million (c £17 million) This is the European Commission definition

R&D Tax Reliefs SME’s – what can you claim? For qualifying expenditure incurred after 1 April 2000 • If the SME is loss making can eithersurrender the loss and claim a refund equivalent to 24% of R&D expenditure from the Inland Revenue (refund limited to PAYE/NIC paid in the period)e.g. Spend £100,000, refund received £24,000 • or carry the loss forward to utilise against future profits • If in profit inflate qualifying R&D expenditure by 50% to obtain a taxation ‘super deduction’

R&D Tax Reliefs SME’s – examples Tax saved: £25k@20%

R&D Tax Reliefs SME’s – examples Tax credit £80@16%

R&D Tax Reliefs Large Company’s Relief • Gain - a 125% deduction for qualifying expenditure • Main differences • No cash back available • 65% rate for subcontract costs do not apply • No requirement to retain rights to IP • Grant income is ignored

R&D Tax Reliefs What is qualifying R&D? • A new definition was introduced by FA 2000 and had effect from 1 April 2000 • Basically qualifying R&D is:- • That which is treated as R&D under normal accounting practice (SSAP 13) and • Is qualified by the DTI guidelines on the meaning of R&D for tax purposes the Inland Revenue have recently issued their commentary on the DTI Guidelines which will • In addition to the Tax Bulletin issued in December the Inland Revenue have recently issued commentary on the guidelines which will form part of a new Corporate Intangibles and R&D (CIRD) Manual for internal use by Inspectors

R&D Tax Reliefs What is qualifying R&D? • SSAP 13 covers the following • Pure or basic research • Applied research • Development • Based on the Frascati definition • “creative work undertaken on a systematic basis in order to increase the stock of knowledge …..and the use of this stock of knowledge to devise new applications” • Must be an appreciable element of innovation

R&D Tax Reliefs What is qualifying R&D? Tax Bulletin • Must seek to achieve scientific or technological advancement • Generates information that advances understanding of scientific disciplines • To resolve technological uncertainty • Seeks to expand knowledge base • Incorporates capability not previously available in standard practice • Uncertainty rather than economic or financial risk is the important characteristic • Involves removing technological uncertainty through systematic investigation • Improvement ineligible if the outcome is predictable • Systematic investigation • Objectives clearly stated at an early stage • Method set out • Results identified

R&D Tax Reliefs What is qualifying R&D? Key messages in the DTI guidelines: • Creative work undertaken on systematic basis to increase the stock of knowledge; or • Use of the stock of knowledge to devise new applications • Pure or applied research AND development(only experimental development and not commercial) • Appreciable innovation • Resolving technological uncertainty • R&D versus product development

R&D Tax Reliefs Qualifying Expenditure • £25,000 (£10k from 9 April 2003) qualifying expenditure de minimis in a 12 month period. • Must be revenue cost. • Attributable to qualifying R and D activity of the company. • Staff costs, consumable stores and certain sub-contracted R and D. • Intellectual property must vest at least in part in the company that carries out the R&D (only for SME relief). • Expenditure is not subsidised ie state aid, grant, subsidy. (only for SME relief)

R&D Tax Reliefs Eligible staff costs • Include salary, pension contributions, employers NIC, costs of agency staff • Redundancy costs and BIK not eligible. • Only costs of staff directly involved in R&D activity are eligible e.g. engineers. Computer programmers, data input staff, director of research (not secretarial or administrative staff) • If staff only spend part of their time on R&D their costs are apportioned • Less than 20% – none qualifies. • More than 80% – all qualifies • Between 80% and 20% – apportioned. • Full appointment basis included at FB 2003 – awaiting Royal Assent.

R&D Tax Reliefs Consumables • Consumable stores are items which would be included within stock under normal accountancy principles. • There is no accounting definition for consumable stores but the principle is that it is stores which are used up in the R&D activity and which by their nature have a comparatively short life • Expenditure on heat, light, power and lease payments are not consumable stores • Software licensing costs and the definition of consumables for these purposes are subject to further consultation.

R&D Tax Reliefs Pre Trading Expenditure • Generally expenditure prior to the commencement of trade is recognised for tax purposes on the day trade commences. • Under R&D relief qualifying costs may be recognised in the accounting period in which they were incurred • Resulting loss may be used as follows; • Surrendered for a cash repayment • Set against other income of the same period • Surrendered as group relief or carried forward • An election must be made in writing to the Inland Revenue • Have 2 years to make the election

R&D Tax Reliefs Capitalised costs • SSAP 13 allows development R&D costs to be deferred and treated as intangible assets. • Qualifying R&D costs which are deferred will only be eligible for relief when they are expensed in the profit & loss account.

R&D Tax Reliefs SME relief Large relief Company that commissions work & takes risks Company that Undertakes the R&D Subcontracted R&D • The essential difference between the SME and large relief is:- • This is highlighted in the situation where the R&D activity is either sub-contracted out of the company or sub-contracted to it

R&D Tax Reliefs Activity subcontracted out of company

R&D Tax Reliefs Activity subcontracted to the company

R&D Tax Reliefs Claims & Documentation • The claim must be made in the tax return • The claim should be documented,although under CTSA no requirement to submit documentation • Inland Revenue expect records to be reasonable in the context of the size of the claim and business to which it relates • They are encouraging companies to meet with their inspectors in advance of making a claim. It should be noted however that this is not an advance clearance mechanism.

R&D Tax Reliefs Action Points • Assess what will qualify • Examine systems to capture the data and calculate the claim • What type of claim will be made? How will this be accounted for? • Consider SSAP 13 disclosure in accounts • Discuss the timing of the tax returns

Any Questions ? PwC contacts: Tracey Bentham 0117 928 1194 Denise Roberts 029 2080 2308 Clare James 029 2080 2218 Mark Tibbert 029 2080 2722

Research & Development Tax Reliefs Tracey Bentham & Denise Roberts 8 July 2003