1. R&D tax reliefs: Not just lab coats and microscopes!
Guang Deng
R&D Tax Manager
Leyton UK

2. Contents UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
Patent Box
Appendix

3. CCH and Leyton
CCH has partnered with Leyton UK to provide a Research and Development service for clients
Leyton has over 530 advisers specialised in their field – including engineers, scientists and IT/software experts
Further information:
CCH advice lines

4. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit

5. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
Expenditure based tax incentive
Super deduction
The uplift
Enhance tax deductible expenditure against taxable profit
SME vs large company
Resulting tax benefits vary depending on company tax position
From 1 August 2008
Number of employees; and
< 500
Turnover; or
≤ €100 million
Total Assets
≤ €86 million

6. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
An example of comparison
Figures shown are shown for illustration purposes
* Tax Rate may vary according to company tax position
* Calculated as 12.5% of the 200% Enhanced Expenditure
SME Scheme
Large Company Scheme
Loss
Profit
Qualifying R&D Expenditure
£ 100,000
Uplift
£ 30,000
Enhanced Expenditure
£ 200,000
£ 130,000
Tax Rate* 0%
20%
24%
Credit
£ 25,000*
N/A
Relief
£ 20,000
£ 7,200

7. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
SME Scheme
Large Company Scheme
225% of enhanced deduction since 01/04/2012
(200% from Apr 2011, 175% from Apr 2010)
130% of enhanced deduction since 01/04/2008
Payable tax credit
(see Appendix IV for more details)
No payable tax credit, yet
Subcontracting costs can be included
(subject to restrictions)
Claim may be reduced if the R&D project is subsidised
No reduction on relief for grants or subsidies received

8. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
The Payable Tax Credit is only available to SMEs
Tax loss-making position
Losses can be surrendered in return for cash due from HMRC
Tax credit is capped by the company’s PAYE & NIC contributions paid (abolished 1 April 2012, subject to state aid approval)
Are large company losing out?

9. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
The Above the Line (ATL) tax credit – 9.1% return (before tax)
Visibility and signal to international investors
Large companies better off, compared to now
Effective from 1 April 2013
Stage 2 consultation
Accounting and tax impact

10. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
R&D definition – unchanged for tax purposes
BIS Guidelines:
Scientific or technological advance
An advance in a overall knowledge or capability in a field of science or technology
Includes the adaptation of knowledge or capability from another field of science or technology in order to make such an advance where this adaptation was not readily deducible
Scientific or technological uncertainties
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
Systematic, Investigative or Experimental activities
Not accidental discovery
Logical, planned approach to undertake the R&D activities
The timeline should highlight the design alternatives and the analysis or tests done to select between alternatives

11. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
Project description and technical orientations
Phase of studies, investigation and engineering
Laboratory studies, prototype and pilot plant tests
Validation tests
Mass production
Commercial exploitation
Examples of eligibility during a new product development process
Qualifying Activities
Resolution of Uncertainty
Non-Qualifying Activities, typically

12. UK R&D Tax Relief and the ‘Above the Line’ Tax Credit
QUALIFYING EXPENDITURE
Agency workers who are actively engaged in carrying out R&D
Staff Costs related to staff who are involved in carrying out R&D
Software licences used directly in carrying out R&D
Minimum annual qualifying expenditure of £10,000 (to be abolished from 1st April 2012, subject to state aid approval)
Clinical trials (Large Companies from 1 April 2006 and from 1st August 2008 for SMEs)
Consumable or transformable materials used directly in carrying out R&D
Subcontracting costs (only for SME, certain conditions for large companies)

13. Patent Box

14. Patent Box Revenue based tax incentive 10% tax rate
Effective from 1 April 2013
Qualifying conditions
Company
Intellectual properties (IP)
Income
Profit
What it means to UK companies
Single entity vs groups
Patent or not
Define responsibilities
Apportionment methodology

15. Appendix

16. Appendix: Industry Examples
Manufacturing and Mechanical Engineering
Eligible activities for R&D tax relief:
Design and development of a new cutting or forming machine prototype offering functionalities that are not straightforward to achieve
Behaviour analysis of newly developed materials under high thermal/vibration/pressure stress conditions or new/novel analysis of existing materials
Non-straightforward adaptation of existing products to meet changing government or industry environmental or safety standards
Development of a unique manufacturing process to increase precision or efficiency
Significant reduction of waste through process and machinery innovation
Not eligible:
Minor adaptations to a manufacturing process or mechanical product – e.g. trivial calibration of a sensor or a simple aluminium plate design based on previous products
Expansion of a production line that only involves replication rather than innovative improvements

17. Appendix: Industry Examples
Software and Systems Engineering
Eligible activities for R&D tax relief:
Development of a complex web based material database management system to improve information speed and security while tracking plant operations and customer product deployment
Design of a production system combining electronic sensors/controllers and mechanical elements (valves, heating elements, vacuums, etc.) in a novel way
Developing complex automated scripting to improve manufacturability analysis, e.g. verifying a PCB design meets both the electrical and manufacturing constraints
Implementing a complex power reduction/management system as a green industry initiative
Integration of complex manufacturing processes into one fully automated process by combining multiple user controls or PLCs into one software control centre
Not eligible:
Routine deployment of a standard software process tracking tool
Website design and development (use of standard PHP, Javascript and so on)
Straightforward automation of a previously manual process