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

InfoLab - Technology Matters Event Overview of R&D Relief Scheme Anthony Cox 5 September 2007 TAX

4 © 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. What is R&D Tax Relief? Company tax relief – Reduce a Companys tax bill or provide a cash sum for SMEs 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%

5 © 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. 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

6 © 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. R&D Tax Relief Schemes Undertake activities Qualifying as R&D for tax purposes Capital Expenditure Revenue Expenditure R&D Allowances 100% in year of expenditure SME* R&D Tax Relief 150% Super Deduction Tax Credit 24% Payable Credit R&D Tax Relief 125% Super Deduction Large Company * By reference to Commission recommendation 96/280/EC or 2003/361/EC Potential for

7 © 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. R&D Tax Relief – The Rules SME SchemeLarge Company Scheme Categorisation <250 Employees Turnover 40(50)m or Balance sheet total 27(43)m (01January 2005) Independent Any company not an SME Commencement01 April April 2002 IP OwnershipMust vest within the companyNo 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

8 © 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. R&D Tax Relief – SME Illustration SME R&D SchemeNo R&D ClaimClaim for R&D Tax Relief Profit/(Loss) before tax £500,000 (£1,000,000) R&D additional deduction (£1m R&D spend x 50% uplift) £Nil(£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

9 © 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. R&D Tax Relief – Eligible Expenditure Staff Costs – Employees directly and actively engaged on R&D – Salaries, emoluments, secondary class 1 NICs, pension contributions Externally Provided Workers – Contract staff provided by 3 rd -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

10 © 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. 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

11 © 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. 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 subject to EC state aid approval rules Extension of SME scheme to mid-sized companies: Employees: T/O: 50m 100m Balance sheet total: 43 86m Finance Bill 2007 – date TBC

12 © 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. 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 Event The Definition of R&D for Tax Purposes Rebecca Murdoch 5 September 2007 TAX

14 © 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. Everyones 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

15 © 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. 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

16 © 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. 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

17 © 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. 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.

18 © 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. System Integration Data Processing Mail In Packing Client Services Stock Control Consumer Services Stock Reporting Client Reporting Warehouse Finance & Invoicing 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.

19 © 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. Where Does R&D Start? Not R&D until this point

20 © 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. 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

21 © 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. 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

InfoLab - Technology Matters Event Making an R&D Tax Relief Claim Anthony Cox 5 September 2007 TAX

23 © 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. Making an R&D Tax Relief Claim How can R&D tax credits be claimed? – Claimed in the companys 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

24 © 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. 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

25 © 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. KPMG approach - Process map Agreed Claims Information INPUT OUTPUT Capture qualifying costs R&D activities R&D expenditure Assessment of activities Document eligible activities Compilation of information into claim Meetings with key R&D and finance personnel Planning meeting Design methodology to quantify claim Possible discussions HMRC Possible automation of data capture

26 © 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. 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! DONT MISS OUT!

27 © 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. Questions Any Questions?

28 © 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. Contacts Rebecca Murdoch Tax Consultant Tel: Anthony Cox Tax Senior Manager Tel: