How you could benefit from valuable Tax Relief for Research and - PowerPoint PPT Presentation

How you could benefit from valuable Tax Relief for Research and Development Your complimentary webinar from Coastal Group Thank you for joining Advise | Assist | Answer Your Questions

Hosted by: • Neil Jones, Marketing Manager - Coastal Group Speakers: Richard Tyler, Senior Tax Manager – PKF Francis Clark • • Loren Jenner, CEO – Coastal Group Advise | Assist | Answer Your Questions

TAX RELIEF FOR EXPENDITURE ON RESEARCH AND DEVELOPMENT Richard Tyler PKF Francis Clark LLP

OVERVIEW ▪ Why make a claim for R&D tax relief? ▪ What is R&D for tax purposes? ▪ Examples of possible R&D activities ▪ Can you claim? 4

OVERVIEW R&D tax credits are a tax relief designed to encourage greater R&D spending. They work by either reducing a company’s liability to corporation tax or by making a payment to the company. 5

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WHY MAKE A CLAIM FOR R&D TAX RELIEF ▪ For SMEs: An additional tax deduction of 130% of R&D costs ▪ For loss-making SMEs: Surrender R&D losses in return for cash payment from HMRC of 14.5% of the enhanced R&D costs ▪ For large companies: Effective tax savings of 9.72% of R&D expenditure under the RDEC scheme 9

WHAT IS R&D FOR TAX PURPOSES? “ A project which seeks an advance in science or technology, the activities of which directly . contribute to achieving this advance through the resolution of scientific or technological uncertainties” 10

R&D – GOVERNMENT GUIDELINES • Extending overall knowledge or capability in a field of science or technology • Create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology • Make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes • Use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)

R&D – SOFTWARE DEVELOPMENT • Improvements to a software program: This involves meaningful changes that optimise the functions of the software • Developing software for new computer hardware • Developing or improving software for devices that already have pre-installed Operating systems like mobile phones and tablets among others • Developing algorithms and applications, network engineering and coding • Developing new application software or new operating systems • Enabling applications or software to ‘interact’ and feedback data with newly developed coding

WHAT IS R&D FOR TAX PURPOSES 13

R & D – SME OR RDEC? SME • Company must be a going concern • Must not have been contracted to carry out the R & D (except some circumstances) • Must not have received notified state aid or subsidies in relation to the project • It is an SME company based on the following definitions: • Less than 500 staff; and • Turnover <€100m; or • Balance Sheet Total <€86m (the totals above are for the whole group of companies, part time staff are apportioned) Where the above criteria are not met a claim under the RDEC scheme can be made, except for the going concern condition. The company must be a going concern to also claim under the RDEC scheme.

QUALIFYING EXPENDITURE • Staff Costs – Salary, Bonuses, Employers NIC, Employers Pension Contributions, Reimbursed Expenses • Consumable Items – Items used up in the process, includes power, heat and light • Software – Used in the R & D project • Externally Provided Workers (Restricted to 65%) • Sub-contracted costs* (Restricted to 65% or actual cost for connected parties). The above costs are those only in relation to the R & D and a just and reasonable percentage is usually applied where timesheets are not kept or for example apportioning software only partly used in a project. HMRC do not usually accept 100% of someone's time is in relation to R & D as there are periods throughout a project whereby other tasks are undertaken and some are standard and not R & D. All of the above expenditure must either be in the P & L during the year of the claim and/or an intangible fixed asset and fall into one of the above categories. *Restricted under the RDEC scheme

QUALIFYING EXPENDITURE Watch out for: • Grants/Subsidies • Prototypes/First in Class items • Reimbursed expenditure • Large companies subcontracted expenditure • Rent • Dividends • PAYE paid from 1 April 2021

R&D AND GRANTS Expert advice at the grant application stage can help avoid unnecessary future restrictions on the availability of R&D tax relief ▪ Not mutually exclusive – it is possible to receive grant funding and make a claim for R&D tax credits ▪ Consider three separate scenarios and their effect on the availability of R&D tax relief: ▪ Non-project specific grant (notified state aid) ▪ Project specific grant (notified state aid) ▪ non-state aid grant 17

R&D AND GRANTS - EXAMPLES Non-project Project Non-state specific grant specific grant aid grant (state aid) (state aid) Costs qualifying for relief under the SME R&D £nil £100,000 £150,000 tax credits regime Costs qualifying for relief under the RDEC £200,000 £100,000 £50,000 scheme Tax benefit of claim for R&D relief £19,440 £42,720 £54,360 18

QUALIFYING EXPENDITURE Watch out for: • Grants/Subsidies • Prototypes/First in Class items • Reimbursed expenditure • Large companies subcontracted expenditure • Rent • Dividends • PAYE paid from 1 April 2021

CAPITAL EXPENDITURE Research & Development Capital Allowances (RDAs) 100% FYA Available on buildings used for the R & D

EXAMPLE 1 – WIDGET LTD Research & Development Costs: £100,000 £ £ Profit Before Tax 200,000 200,000 Plus: Depreciation 1,000 1,000 Disallowable Expenses 1,000 1,000 Less: Capital Allowances (500) (500) R & D (SME SCHEME) (130,000) PCTCT 201,500 71,500 Company is profit making and claiming under SME scheme.

EXAMPLE 1 – WIDGET LTD £ £ PCTCT 201,500 71,500 Tax at 19% 38,285 13,585 Corporation Tax Saving of: £24,700

EXAMPLE 2 – GADGET LTD Research & Development Costs: £100,000 £ £ Profit Before Tax 50,000 50,000 Plus: Depreciation 1,000 1,000 Disallowable Expenses 1,000 1,000 Less: Capital Allowances (500) (500) R & D (SME SCHEME) (130,000) PCTCT 51,500 (78,500) Company is loss making and claiming under SME scheme.

EXAMPLE 2 – GADGET LTD £ £ PCTCT 51,500 (78,500) Tax at 19% 9,785 - Surrender Losses at 14.5% 11,383 Corporation Tax Saving of: £21,168

EXAMPLE 3 – GIZMO LTD - RDEC Research & Development Costs: £100,000 £ £ Profit Before Tax 200,000 200,000 Plus: Depreciation 1,000 1,000 Disallowable Expenses 1,000 1,000 RDEC Credit 13,000 Less: Capital Allowances (500) (500) PCTCT 201,500 214,500 Company is profit making and claiming under RDEC scheme.

EXAMPLE 3 – GIZMO LTD - RDEC £ £ PCTCT 201,500 214,500 Tax at 19% 38,285 40,755 RDEC CREDIT (13,000) Tax payable at 19% 27,755 Corporation Tax Saving of: £10,530

EXAMPLES OF RECENT SUCCESSFUL CLAIMS • Design changes required to allow installation of standard products in confined locations • Development of pilot manufacturing processes • Use of new materials, waste reduction, changes in legislation/regulation • Bespoke CRM/business software development • Construction techniques • Changes to working practices due to COVID? 27

CAN YOU MAKE A CLAIM? • Do you use technology to improve your products or processes? • Is it an advance in a field or science and company’s technology not just your own knowledge? • Failure is not a barrier to making a claim! • A claim may still possible even if the R&D is grant funded, or if you are undertaking R&D for a customer • You have up to two years from the end of the accounting period in which the qualifying costs were incurred in which to make a claim via the company’s corporation tax return

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Bristol Salisbury Taunton Torquay 0117 403 9800 01722 337661 01823 275925 01803 320100 Exeter Plymouth Poole Truro 01752 301010 01392 667000 01202 663600 01872 276477 PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at www.pkf-francisclark.co.uk Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. .