August’s Expert Advice- Bevan & Buckland
This month’s expert advice comes from Paul Arnold.
Paul Arnold is Tax Partner at Bevan & Buckland and specialises in assisting companies with their Research & Development (“R&D”) tax relief and Patent Box claims. Paul was previously the regional head of the R&D Tax Services at a Big 4 firm and is currently also a member of HMRC’s R&D Consultative Committee.
1. I understand there are generous tax reliefs available for companies that incur expenditure on R&D, how does this relief work?
Companies that incur expenditure on R&D are able to claim an enhanced tax deduction, and loss making companies may be able to claim actual cash from HMRC.
For example, an SME that incurs £100,000 on R&D could claim a £225,000 tax deduction. If profitable, this could reduce the company’s tax liability by at least an additional £25,000. If loss making, the company could claim tax free cash of approximately £25,000 – with the PAYE/NIC condition which previously applied now removed.
2. I have made an R&D claim and received these cash benefits so I do not need to consider this further?
Maximising an R&D claim can be complex as detailed knowledge of the scheme is required. In preparing an R&D claim it is vital that all qualifying projects and activities are identified, and all qualifying costs are claimed. I have assisted many companies re-submit R&D claims, with many of these amended R&D claims resulting in hundreds of thousands of pounds worth of additional cash benefits. One such claim increased the cash benefit received by the company by approximately £1m.
3. Would you carry out such a review on a wholly contingent basis?
Yes. If I do not identify additional cash benefits for the company there would be no charge.
4. I am an SME but the R&D activity is grant funded and therefore I understand I will not be able to claim tax free cash from HMRC. Is that correct?
There has been a significant change to the large company scheme (under which grant funded projects are claimed). Since 1 April 2013 all loss making companies in receipt of grants (as can other companies claiming under the large company scheme) may be able to claim actual cash from HMRC, at a rate equivalent to approximately 8% of the qualifying spend.
5. Just to confirm, if I receive a grant the new rules will apply to me?
Yes. However, it is important to note that if a company is carrying on two projects, only one of which is grant funded, the unfunded project could be claimed under the more generous SME scheme. I often undertake a review of a company’s activities to assess whether it is carrying on more than one project under the tax definition of a “project”. This frequently results in a company claiming under both the SME and the large company schemes.
6. I will still need to move overseas to commercialise the IP won’t I?
The R&D tax regime has been extremely successful at encouraging companies to undertake their R&D activities in the UK. However, once developed, UK plc has been losing out because many companies have commercialised their IP overseas. A key driver for this has often been that the UK tax regime has been deemed to be uncompetitive.
However, on the 1 April 2013 the Government introduce the Patent Box, which applies a 10% effective tax rate to profits derived from qualifying patents. This should encourage more companies to commercialise their IP in the UK. For example, if a company develops a chip which is patented and integrated into a car, under the UK scheme the profits from the sale of the car itself (and not simply the chip) could qualify for the effective 10% corporate tax rate.