Kathie Haunton, director in Deloitte’s tax practice, explores the potential advantages of Research and Development Expenditure Credit for manufacturing firms.
The government is very keen to support innovation in the UK and Budget 2014 confirmed this backing. In March, the Chancellor announced an increase in the value of the research and development (R&D) cash credit available to small, loss-making companies from just under 25% to 32.6% of their R&D expenditure.
For large companies the new Research and Development Expenditure Credit (RDEC), which was introduced from April 2013, provides a taxable benefit of 10% of the R&D spend to be included in the company’s operating profit in the same way as a grant.
This means that there has never been a better time to claim the R&D relief. Engineers within manufacturing companies should therefore be asking:
· Does my company carry out eligible activity?
· How much money could my company claim?
· What do I need to do to make a claim?
The key requirements for making a R&D claim and some of the practical matters that need to be considered are addressed below.
What does eligible activity look like?
HMRC use a two part test to determine whether an engineering activity is eligible R&D or not, and most engineering teams are surprised by how widely this test applies to their daily activities. The definition of R&D requires a company to be:
1) Seeking a step forward in the capability or understanding available to its industry sector; and
2) Resolving any technical problems or hurdles to achieve this.
Consequently, the staff costs associated with developing new or improved products or processes, and acquiring new technical knowledge, can all be eligible for the relief. The test does recognise that some information is not shared between companies, so if a company is aware that a competitor has achieved something, but the details of how it has been achieved are not publically available, it is still possible to include the costs of the “me too” development in a R&D claim.
Work undertaken on projects that are not completed can also be included as there is no requirement for success or commercialisation. In fact, HMRC recognises that companies often learn most from projects where the technical hurdles are not overcome.
How big would the benefit be?
A small and medium sized enterprise (SME) is broadly defined as a company which, together with certain related companies, has fewer than 500 employees and either turnover not exceeding €100m or total assets not exceeding €86m. As an example, a loss making SME which has spent £800,000 on payments to staff and contractors, and £200,000 on materials and software licences, could claim up to £326,300 of cash back from HMRC. The costs of subcontracted R&D work, such as specialist testing, can also be included in the claim subject to restricting the amounts claimed to 65% of the payments made to the third party.
If the SME was paying corporation tax and had incurred R&D spend of £1m, the benefit could be up to £287,500. Cash amounts of this size can have a considerable impact on the amounts available to fund development projects.
The new RDEC regime for large companies (all companies that are not SMEs) gives a company the opportunity to claim a grant that can be offset against the company’s corporation tax bill; or for non-tax payers (for example those companies with current period or brought forward tax losses) repaid to the company as cash.
This is an improvement on the old regime and means that companies that could not previously derive an immediate benefit from the R&D reliefs can now get cash back. The cash is paid to the company after the deduction of tax so for every £1m of R&D spend the company can receive up to £77,000 cash.
How do you make a claim?
Establishing a R&D claim process does involve some investment of time, but once a methodology is in place, preparing claims on an annual basis can be relatively pain free. HMRC expects the technical team at a company to be involved in the claim preparation, as these staff will need to assess the level of eligible activity that is being undertaken by the company.
Eligible activity is generally identified by reviewing the projects or activities undertaken by various teams. The technical team need to consider whether all of the activities involved in a project relate to the technical challenge or whether the work also included routine engineering, commercial or administrative activities that need to be excluded from the assessment.
The accounting records can be used to collate the relevant project costs: employee costs, payments for third party resources and the purchase of materials, software and some utility costs, and the eligibility assessment applied. Once the claim is quantified, the number is included in the company’s corporate tax return as part of the year end compliance process.
In summary, now is the time for all manufacturing companies to be asking whether they are solving technical problems or challenges. If the answer is yes, then there is cash to be claimed back.