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InfoLab - Technology Matters Event R&D Tax Relief Seminar. 5 September 2007 TAX . Agenda. Overview of the R&D Tax Relief Scheme The Rules Eligible Expenditure Proposed Changes The Definition of R&D for Tax Purposes Making an R&D Tax Relief Claim Questions – Open Forum.

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agenda
Agenda
  • Overview of the R&D Tax Relief Scheme
    • The Rules
    • Eligible Expenditure
    • Proposed Changes
  • The Definition of R&D for Tax Purposes
  • Making an R&D Tax Relief Claim
  • Questions – Open Forum
what is r d tax relief
What is R&D Tax Relief?
  • Company tax relief
    • Reduce a Company’s tax bill or provide a cash sum for SME’s
  • Tax incentive
    • Encourage greater R&D spending
    • Promote investment in innovation
    • UK Target 2.5% of GDP by 2014 (~75% increase on current levels)
who can claim r d tax relief
Who can claim R&D Tax Relief?
  • Only Companies can claim
    • Excludes partnerships or local authorities
  • Relevant R&D
    • Expenditure must be incurred on R&D relevant to the trade of the company
  • Not Capital expenditure
    • Expenditure must be deductible in computing the profit for tax
  • Two Schemes
    • A small or medium company – SME scheme;

or

    • Any company other than a SME - Large Company scheme
r d tax relief schemes
R&D Tax Relief Schemes

R&D Allowances

100% in year

of expenditure

Capital Expenditure

R&D Tax Relief

150% Super

Deduction

Undertake

activities

Qualifying as

R&D for tax

purposes

SME*

Potential for

Revenue Expenditure

Tax Credit

24% Payable Credit

R&D Tax Relief

125% Super

Deduction

* By reference to Commission recommendation 96/280/EC or 2003/361/EC

Large Company

r d tax relief sme illustration
R&D Tax Relief – SME Illustration
  • SME R&D Scheme
  • No R&D Claim
  • Claim for R&D Tax Relief
  • Profit/(Loss) before tax
  • £500,000
  • £500,000
  • (£1,000,000)
  • R&D additional deduction
  • (£1m R&D spend x 50% uplift)
  • £Nil
  • (£500,000)
  • (£500,000)
  • Profits chargeable to tax
  • £500,000
  • £0
  • (£1,500,000)
  • Corporate tax at 30%
  • £150,000
  • £0
  • (£450,000)
  • (£285,000)
  • Corporate tax at 19%
  • £95,000
  • £0
  • Cash tax saving
  • By making an R&D claim based on £1m of qualifying R&D expenditure
  • £150,000 or £95,000
  • (15% or 9.5%)
  • Payable credit – 24% of £1m
  • By surrendering £1.5m of qualifying losses (or 16% of £1.5m)
  • £240,000(1)

1: Capped by the PAYE and NIC liabilities for payment periods ending in the accounting period.

r d tax relief eligible expenditure
R&D Tax Relief – Eligible Expenditure
  • Staff Costs
    • Employees directly and actively engaged on R&D
    • Salaries, emoluments, secondary class 1 NIC’s, pension contributions
  • Externally Provided Workers
    • Contract staff provided by 3rd-party staff provider
    • Directly and actively engaged on R&D
    • Subject to the supervision, direction or control by the company performing the R&D
    • 65% of expenditure paid to staff provider or payment made to staff provider
  • Consumable Stores or Items
    • Materials consumed/transformed as part of the R&D process
    • Power, water, fuel used in directly carrying out the R&D
    • Computer software used directly in carrying out the R&D
claim time limits
Claim Time Limits

2006 Budget

  • Reduction in the time period for claiming R&D tax relief from:
  • 6 years → 2 years

Effective for APE on or after 31 March 2006

Transitional rules apply for earlier periods:

Earlier of:

        • Six years after the end of the relevant accounting period; AND
        • 31 March 2008

Opportunity to ‘enhance’ previous claims to claim the full extent of the relief available

proposed changes
Proposed Changes

2007 Budget

Large Company Scheme

Rate of relief to increase: 125% → 130%

Expected in Finance Bill 2008

SME Scheme

Rate of relief to increase: 150% → 175%

Expected in Finance Bill 2008 - subject to EC state aid approval rules

Extension of SME scheme to mid-sized companies:

Employees: ≤ 250 → ≤500

T/O: ≤ €50m → ≤€100m

Balance sheet total: ≤ €43 → ≤€86m

Finance Bill 2007 – date TBC

the value of r d tax relief
The Value of R&D Tax Relief
  • Cash benefit – Cash saving and/or more to spend on R&D
  • Reduction in effective tax rate
  • Reduced net cost of R&D
  • Potential annuity - Cash tax benefit
  • Corporate Governance
infolab technology matters event the definition of r d for tax purposes

InfoLab - Technology Matters EventThe Definition of R&D for Tax Purposes

Rebecca Murdoch

5 September 2007

TAX

slide14

Who conducts R&D?

Everyone’s first thought?

Pure research or ‘Blue-sky’ development

What about development?

  • Anycompany can conduct R&D for tax purposes
  • R&D is not limited to the R&D department
dti guidelines some definitions
DTI Guidelines: Some Definitions

“R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.”

In the eyes of the DTI, R&D has a much wider definition and can cover a number of different activities.

slide16

Potentially Qualifying R&D – IT / Banking / FS sectors

  • Product Development
    • Fraud Detection:Algorithms for real-time fraud detection
    • Online Security:On-going work on improving online security and dealing with new security threats
    • ATM Mobile Phone Top-Up: Architecture for mobile phone top-up via ATM
    • Risk Modelling: Development of risk modelling and underwriting software including any work on implementing new algorithms
    • Risk Quantification: Development of solution to quantify risk based on factors such as:

1. Usage e.g., Pay-as-you-drive schemes or

2. Genetics/historical factors e.g., life insurance based on genetic make-up or family/medical history

    • Chip ‘n’ PIN: Development of contact-less Chip ‘n’ Pin solution, primarily around data authentication New characteristics or functionality
    • Legacy issues
    • Integration of new technology - new algorithms developed
    • Security software
    • Improved service quality
    • Connection reliability
    • Faster processing speeds
  • Legal/regulatory
    • Basel II
system integration
System Integration
  • Communication issues

The satellites on earth operate at different frequencies to each other and fail to communicate.

The satellites operate at the same frequency as each other for effective communication.

system integration1

Data Processing

Finance &

Invoicing

Client

Services

Mail

In

SCOPE DATABASE

Client Reporting

Packing

Consumer

Services

Warehouse

Stock Control

Stock Reporting

System Integration

A SCOPe system uses a common platform and integrates each module around it. The modules are based upon the various functions of the business carried out by the company. Using this integrated system, communication between each module is effective and efficient.

where does r d start

FIELD TESTING

/

QUALIFICATION

ITERATIVE

PROCESS

SYSTEM

&

DESIGN

&

DESIGN

&

WORKING

COMPANY

FEASIBILITY

MODULE

TEST OF

TEST OF

PROTOTYPE

/

REQUIREMENTS

STUDY

SPECIFICATION

MODULES

SYSTEM

PILOT PLANT

ITERATIVE

PROCESS

PRE

-

PRODUCTION

INDIRECT ACTIVITIES

RAISING FINANCE

PROJECT

DEVELOP

/

MODIFY

PLANNING OF

TRAINING

PLANNING

,

RISK

PATENT

TOOLS FOR

TEST

RECRUITING

PLANNING

,

APPLICATIONS

PROJECT

PROCEDURES

ADMIN

MANAGEMENT

&

PURCHASING

CO

-

ORDINATION

PAYROLL

Where Does R&D Start?

Not R&D until this point

where does r d finish
Where Does R&D Finish?
  • Resolution of Uncertainty
  • “… when knowledge is codified in a (usable) form… or when a prototype or pilot plant with all the functional characteristics …is produced.”
  • May extend to production or use if Uncertainty

Routine fault-fixing - Fine-tuning - Cosmetic / Aesthetic

Maintenance

NOT R&D

abortive projects
Abortive Projects
  • Intention to achieve an advance in science or technology
  • Insurmountable technical
    • or
    • commercial challenges
        • Completely or partially unresolved uncertainty
        • Incomplete achievement of project objectives

Still R&D

making an r d tax relief claim
Making an R&D Tax Relief Claim
  • How can R&D tax credits be claimed?
    • Claimed in the company’s tax return at the end of the accounting period
    • Supported by a technical report to justify the claim
  • How are claims assessed?
    • Claims are assessed by HMRC tax inspectors
    • Either by R&D specialist offices, local inspectors, or Large Business Service
  • What information will be needed?
    • Nature of the R&D project and the scientific or technological uncertainties
    • Qualifying expenditure analysis
why use kpmg
Why use KPMG?
  • Multi-disciplinary R&D Tax Relief Group
    • Engineers, scientists, software professionals with industry experience
    • Tax and accounting professionals
    • Former HMRC R&D principal technical specialist
  • Least intrusive approach
    • Minimise the time commitment of internal resources
  • Our success and established track record
    • End-to-end support: technical interviews → negotiation & agreement with HMRC
  • Fees
    • Potential to charge contingent fees for our services
  • Our legacy
    • Imparted knowledge of the R&D tax relief scheme
    • Ability to identify and capture qualifying projects in the future
kpmg approach process map

INPUT

OUTPUT

Assessment of activities

Document eligible activities

Compilation of information into claim

Information

Agreed

Claims

Meetings with key R&D and finance personnel

Planning meeting

R&D activities

R&D expenditure

Capture qualifying costs

Design methodology to quantify claim

Possible automation of data capture

Possible discussions HMRC

KPMG approach - Process map
summary
Summary

R&D for Tax Purposes

  • Advance sought in science or technology

- New or appreciably improved – addition of knowledge to industry

  • Resolution of scientific or technological uncertainty

- Technical challenges – not readily deducible

3. Application is wider than you think

Claim Periods

01 April 2002 – onwards for large companies (01 April 2000 for SMEs)

Claim Deadline

31 March 2008 – Just over 6 months to go!

DON’T MISS OUT!

questions
Questions

Any Questions?

contacts

Rebecca Murdoch

Tax Consultant

Tel: 01772 473610

Email: rebecca.murdoch@kpmg.co.uk

Anthony Cox

Tax Senior Manager

Tel: 01772 473671

Email: anthony.cox@kpmg.co.uk

Contacts