InfoLab - Technology Matters Event R&D Tax Relief Seminar 5 September 2007 TAX.

InfoLab - Technology Matters Event

R&D Tax Relief Seminar

5 September 2007

TAX

2© 2006 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are

restricted. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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


Overview 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)

% of GDP

Japan 3.12%

US 2.68%

Germany 2.49%

France 2.16%

UK 1.9% (~£22.5bn)

EU 1.81%



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

Undertakeactivities

Qualifying asR&D for taxpurposes

Capital Expenditure

Revenue Expenditure

R&D Allowances

100% in yearof expenditure

SME*

R&D Tax Relief

150% SuperDeduction

Tax Credit24% Payable

Credit

R&D Tax Relief

125% SuperDeduction

Large Company

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

Potential for



R&D Tax Relief – The Rules

SME Scheme Large Company Scheme

Categorisation • <250 Employees

• Turnover ≤€40(50)m or Balance sheet total ≤ €27(43)m (01January 2005)

• Independent

• Any company not an SME

Commencement 01 April 2000 01 April 2002

IP Ownership Must vest within the company No requirements

R&D Contracted in

R&D Contracted out

Relief not available

(Large Co. relief available ≥ 09 April 2003)

Relief generally available

Relief generally available if contracted by a Large Co.

Relief not available except for approved bodies

Subsidies/grants against expenditure

Reduces claim – eligible for Large Co. relief on unsubsidised component

No impact on claim

Value of relief • 150% Super deduction

• 24% Repayable credit

• 125% Super deduction

• No repayable credit



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)

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%)

(£285,000)

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.

Corporate tax at 19% £95,000 £0



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 yearsEffective 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


The Definition of R&D for Tax PurposesRebecca Murdoch

5 September 2007

TAX



Everyone’s first thought?

Pure research or ‘Blue-sky’ development

What about development?

Who conducts R&D?

• Any company 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.

Advance in science or technology

“extend overall knowledge or capability in a field of science or technology”

“create a process, material, device, product or service” or “make an appreciable improvement to an existing process, device, product or service”

Scientific or technical

uncertainty

“….knowledge of whether something is scientifically possible or technologically feasible, or how to achieve it in practice, is not readily available or deducible by a competent professional..”

“Turning something …. scientifically feasible, into a cost effective, reliable and reproducible process, material, device, product or service”



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.



System Integration

Data Processing

MailIn

Packing

ClientServices

Stock Control

ConsumerServices

Stock Reporting

Client Reporting

Warehouse

Finance &Invoicing

SCOPE DATABASE

SCOPE DATABASE

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?

PROBABLY QUALIFYING

MAYBE QUALIFYING

NOT QUALIFYING

COMPANY REQUIREMENTS

SYSTEM & MODULE

SPECIFICATION

PROJECT PLANNING, RISK PLANNING, MANAGEMENT &CO-ORDINATION

FEASIBILITY STUDY

DESIGN & TEST OF

MODULES

WORKINGPROTOTYPE / PILOT PLANT

ITERATIVE PROCESS

DESIGN & TEST OF SYSTEM

ITERATIVE PROCESS

DEVELOP / MODIFY TOOLS FOR

PROJECT

TRAININGRECRUITINGADMINPURCHASINGPAYROLL

PATENT APPLICATIONS

PLANNING OF TEST

PROCEDURES

INDIRECT ACTIVITIES

PRE-PRODUCTION

FIELD TESTING / QUALIFICATION

RAISING FINANCE

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



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 ClaimAnthony Cox

5 September 2007

TAX



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?

• 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

Agreed Claims

Information

INPUT OUTPUT

Capture qualifying

costs

R&D activities

R&D expenditure

Assessment of activities

Document eligible

activities

Com

pila

tion o

f info

rmatio

n in

to cla

im

Meetings with key R&D and finance personnel

Planning meeting

Design methodology to quantify

claim

Possible discussions

HMRC

Possible automation

of data capture



Summary

R&D for Tax Purposes

1. Advance sought in science or technology

- New or appreciably improved – addition of knowledge to industry

2. 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

Any Questions?



Contacts

Rebecca MurdochTax ConsultantTel: 01772 473610Email: [email protected]

Anthony CoxTax Senior ManagerTel: 01772 473671Email: [email protected]

InfoLab - Technology Matters Event R&D Tax Relief Seminar 5 September 2007 TAX.

Documents

Transcript of InfoLab - Technology Matters Event R&D Tax Relief Seminar 5 September 2007 TAX.