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InfoLab - Technology Matters EventR&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

InfoLab - Technology Matters EventOverview of R&D Relief Scheme

Anthony Cox

5 September 2007

TAX

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?

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 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 – The Rules

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

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

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

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

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 EventThe Definition of R&D for Tax Purposes

Rebecca Murdoch

5 September 2007

TAX

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

“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.

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

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.

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.

FIELD TESTING

/

QUALIFICATION

ITERATIVE

PROCESS

SYSTEM

&

DESIGN

&

DESIGN

&

WORKING

COMPANY

FEASIBILITY

MODULE

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?

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