1. Tax relief for clever companies
R&D Tax Relief
Tax relief for clever companies
Mark Davis
18 November 2016

2. What is R&D Tax Relief?
“A government incentive scheme aimed at encouraging UK companies to invest in Research and Development, delivered through the taxation system”
SME R&D Tax Relief: -
If profitable, up to 26% of the qualifying R&D costs
Losses may be exchangeable for up to 33.35% of the qualifying R&D costs
Large Company R&D Expenditure Credit (RDEC): -
A taxable above-the-line cash payment of 11% of the qualifying R&D costs (currently 8.8% after corporation tax)

3. What counts as R&D?
Any activities that are trying to resolve scientific or technological uncertainty and are seeking to achieve an advance. The BIS guidelines define this for tax purposes and can be confusing, but many practical situations can qualify and it is not as demanding as it sounds
Any situation where a competent professional in a field of technology cannot readily deduce a solution from his/her existing expertise or information in the public domain – the competent professional (i.e. YOU) makes the judgement, HMRC audit that he or she knows the rules
The rules are widely drawn, and there have been some surprising claims!

4. What is an “Advance”? Some examples from the guidelines…
extend 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;
makes 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...

5. What is “Uncertainty”? Some examples from the guidelines…
...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 working in the field
...often arise from turning something that has already been established as scientifically feasible into a cost-effective, reliable and reproducible process, material, device, product or service
Must be scientific or technological – not market, logistics etc
Note that the competent professional is the only person who can judge and explain – the company engineers

6. R&D in practical terms…
What sort of activities does your company undertake?
Are you developing or improving products, tools, services, materials or processes?
Are you conducting experiments with new equipment or experimenting with production techniques?
Are you trying to make something more efficient, scale it up, reduce its cost or improve environmental impact?
Are you facing scientific or technological challenges in trying to reach your goals?
At the start of the work, did you have to consider whether the project was feasible or realistic?
Have you experienced technical failures in doing the work?
If you answered yes to any of these you may be eligible to claim tax relief

7. For Polycon… POSSIBLY POSSIBLY PROBABLY NO NO UNLESS IN UK NO NO NO
STEPHEN HOLMES
WAREHOUSE
Transport & Storage of Spectacle Lenses
Delivery of Spectacle Lenses
POSSIBLY
POSSIBLY
POLYCON
LENS COMPANY
(manufacturing)
WHOLESALERS
WORLDWIDE
Sale of Spectacle Lenses
PROBABLY NO
SALES COMPANY
(Storage/Sale of Telescopic Lenses)
POLYCON IPR
LOW-TAX STATE
(Brand & Product Owner)
NO UNLESS IN UK
Third Party Licensing & Franchise Agreements NO
POLYCON
INT. LICENSING
HIGH-TAX STATE NO NO

8. LUNAR TECHNICS COMPANY
Other Opportunities?
EYEMAX
GROUP HOLDINGS ?
LUNAR TECHNICS COMPANY
CER
(manufacturing)
EYEMAX CORP
manufacturing
VIZITECH HOLDINGS LTD
VIZITECH CORP.
(Digital Camera Manufacturer)

9. Key Points
A wide variety of activities are eligible for R&D tax relief
You can still claim R&D tax relief even if you are being paid to do the work - companies often innovate in parallel to contracted delivery
The development of cost-effective, reliable and reproducible processes can be eligible, even where the technological feasibility is clear
The claiming process does not have to be complex and HMRC will accept a wide range of approaches provided they can be shown to be fair and reasonable
You can back claim R&D Tax relief for the last two years

10. What costs can be claimed?
All project costs that relate to eligible activities are potentially qualifying: -
Qualifying costs claimed have to fall into specific categories: -
There are a number of complicated rules which also apply, in particular around subcontracted R&D costs
Cost capitalised as fixed assets are excluded (can claim as an “RDA”)
Costs subsidised by a grant or client can only be claimed under Large Company scheme
Costs need to be either related to eligible “direct” activities, or eligible “indirect” activities

11. Eligible “direct” activities?
Anything directly needed in the attempt to resolve scientific or technological uncertainty : -
Feasibility studies, proof-of-concept
Design and development of prototypes
Testing and evaluation
Field trials, pilot builds etc
Management and direction of project, resourcing
Costs hit UK P&L of company subject to Corporation Tax

12. Eligible “indirect” activities?
Anything required to create a context for R&D: -
scientific and technical information services, insofar as they are conducted for the purpose of R&D support
indirect supporting activities such as maintenance, security, administration and clerical activities, and finance and personnel activities, insofar as undertaken for R&D
ancillary activities essential to the undertaking of R&D (e.g. taking on and paying staff, leasing laboratories and maintaining research and development equipment including computers used for R&D purposes);
training required to directly support an R&D project;
research by students and researchers carried out at universities;
research (including related data collection) to devise new scientific or technological testing, survey, or sampling methods
feasibility studies to inform the strategic direction of a specific R&D activity.
25th May 2016
©2016 ela8 limited

13. Costs in practical terms..
Are you incurring any of these expenses?
Staffing costs such as salaries, employers’ NI or pension contributions
Payments to staff controllers such as agencies and other third parties supplying manpower
Materials and utilities (water, fuel and power)
Computer software that is specifically required to support your R&D efforts
Sub-contracted R&D, where you are paying a third party to undertake a package of work
If you answered yes to any of these you probably have qualifying expenditure
25th May 2016
©2016 ela8 limited

14. Approaches to claiming
It doesn’t have to be complex…
Any approach that is demonstrably fair and conservative, and backed by the technical experts in the company, can be acceptable to HMRC
Project based, Team based, Individual based and Proportionate approaches have all been successful
Certain industries can present challenges if eligible activities are spread thinly across numerous projects, but role-based approaches and example activities can be used to simplify claims
This approach has proved successful for a number of large companies, generating millions of pounds of benefit

15. What does the process look like?
Identify eligible activities – and supporting evidence
HMRC tend to want to audit how this was decided – was a competent technology professional involved, can they explain etc.
Use an appropriate process that collects only costs that relate to eligible activities
HMRC will look for costs that may not relate directly to the R&D process - what evidence do you have that you thought about this etc.
Only claim “qualifying” categories of these costs
Companies sometimes miss qualifying costs, and also claim non-qualifying items. Obvious mistakes can undermine the credibility of the claim process.

16. Summary Points
The R&D regimes were introduced to reward scientific or technologically challenging work, regardless of the industry
HMRC encourages claims within the all sectors
Claims provide competitive advantage and encourage further development
Claims are submitted in the usual corporation tax return, along with supporting documentation (not prescribed, although there is best practice)
Important to consider claims for earlier periods as there is still opportunity to amend some historic tax returns
Expert advice is essential and can be provided on a contingent fee basis

17. r&d tax relief Mark Davis Telephone: 0203 740 7172
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