r&d tax credits how to benefit from the latest initiative...• “r&d for tax purposes...

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor

industry’ brandline are trademarks of SMMT Ltd

R&D Tax Credits –

How to benefit from the latest initiative

Yung Tran, Head of Member Services and Business Improvement, SMMT

Robert Baker, Chief Economist, SMMT

Diarmuid MacDougall, Partner, PwC

18 April 2013

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED PAGE 2

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Robert Baker

Chief Economist

SMMT

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED SMMT, the ‘S’ symbol and the ‘Driving the motor

industry’ brandline are trademarks of SMMT Ltd

UK Budget 2013 – banking on firmer GDP growth ahead

• It wasn’t planned to be this way – rewind to Budget 2008

• Recovery drags; fiscal consolidation relaxed and rejigged

• Public finances weaker than expected at June 2010; so higher

borrowing, for longer and spending ‘shifted’ around


On the UK’s Budget plans 2008 and 2013 (1)

Budget 2008 Budget 2013 Budget 2013

£bn 2012/13F 2012/13P 2016/17F

Current Receipts 721 589 694

Current Spending 680 657 704

Current Balance 18 (93) (35)

Net Investment 41 28* 32*

Public Sector Net Borrowing (23) (121)* (67)*

Cash Value UK GDP 1,841 1,526 1,806

Gross Stock Public Debt 731 1,189 1,580

* Adjusted for capital receipts from Royal Mail, APF & 4G which reduce net investment to £-6bn in 2012/13


On the UK’s Budget plans 2008 and 2013 (2)

The UK & Europe public finances – deficits and debt

2013

Budget 2008 Budget 2013 Budget 2013

as a percentage of UK GDP 2012/13F 2012/13P 2016/17F

Current Balance 1.0% (6.1%) (1.9%)

Public Sector Net Borrowing 1.2% 7.9% 3.7%

Gross Stock Public Debt 39.7% 77.9% 87.5%

General Government as percent of GDP UK Germany Euro Zone

net borrowing 7.6% 0.2% 2.8%

net debt 93.9% 80.7% 95.1% Maastricht Treaty deficit and debt basis – Mar 2013 OBR EFO


Fiscal consolidation by 2017/18 and fiscal priorities

• Planned tax rises 80% complete by 2012/13; 80% of cuts to day-to-day spending and 70% of benefits to come

• To date the key fiscal priorities under the Coalition are:

1 taking the Personal Tax Allowance to £10K in 2014/15

2 Corporation Tax rate 20% for all businesses – 2015/16

3 Fuel Duty increases postponed & cancelled – for now

= IFS estimates the total cost to be £24bn by 2016/17

• Rebalancing policies, like the reformed Large Firm R&D Tax Credit Regime are slow-burners; key incentives to aid economy-wide shift to investment & exports. In time this should work. But the immediate focus is on housing again with major aid guarantees in First & Help to Buy Schemes

R&D Credits

Diarmuid MacDougall

• www.pwc.co.uk

PwC

Agenda • What is R&D?

• R&D tax relief schemes

• Small & Medium sized Enterprises (SMEs)

• Large company scheme

• Capital expenditure

• Qualifying costs

• Claim Methods

• The new ‘Above The Line’ R&D Expenditure Credit

Slide 9

PwC

What is qualifying R&D?

Slide 10 18 April 2013 SMMT R&D Webinar

PwC


• “R&D for tax purposes takes place when a project seeks to achieve an advance in overall knowledge or capability in a field of science or technology. The activities that directly contribute to achieving this advance through the resolution of scientific or technological uncertainty are R&D.”

• When a product or process is introduced or changed and, for technological reasons, it is necessary to “try it out” to see if it worked then it is likely R&D has been performed.

• Overall knowledge can still be advanced where it is known that an advance has been achieved but the details of how are not readily available

• An advance may seek to extend the overall knowledge, duplicate an existing technology in a fundamentally different manner or make an appreciable improvement to an existing technology.

• An appreciable improvement should be more than minor or routine upgrading and should represent something that a competent professional user working in the field would consider to be genuine and non-trivial.


PwC


Examples include:

• Efforts to design and make components to more demanding tolerances or to perform in more demanding conditions – e.g. whether it is possible to machine at the higher tolerances within acceptable distortion levels caused by clamping forces and release, work with foundries to change casting methods etc. Technical challenge caused by design modification to rotate at faster rpm, withstand greater operating temperatures etc

• Design uncertainty caused by system impact of changes in dimensions, power, weight etc – such as effect on design of crash zones in a vehicle, impact on seal performance caused by aerodynamic changes resulting in greater pressure differences over door/window areas etc

Indications of uncertainty

• Need to model solution, build prototypes and perform substantial testing

• Failures, modifications, redesign – an iterative design process

• Contingency/plan for technical risk


PwC April 2013

Strictly private and confidential

R&D Tax Relief Schemes

PwC

What is a SME?

– Less than 500 employees

• and

– either annual turnover €100m or balance sheet €86m

– There is a year of grace if these limits are breached

•Numbers include those of investors:

– 100% if investor controls company

– Proportion if between 25% and 50% investment (but certain

investors disregarded – VCs, universities, business angels,

institutional investors)

Slide 14

Section 2 - Overview of R&D tax reliefs

PwC

Small or Medium Enterprises

(SMEs)

Unfunded / internal R&D Funded R&D

Internal cost e.g.

employees

External cost

e.g. payments to

subcontractors

Policy objective: to address difficulties in raising funds

Slide 15

PwC

SME: What is the benefit

Reduced Taxable profit

Surrenderable loss

OR

From

April

2011

From April 2012

From April 2013

From April 2011

From April 2012

From April 2013

Qualifying R&D £1m £1m £1m Qualifying R&D £1m £1m £1m

Extra 100%/125% £1m £1.25m £1.25m Extra 100%/125% £1m £1.25m £1.25m

Tax saved on extra at 26%/24%/23% £260k £300k £287.5k

Potential loss to surrender

£2m £2.25m £2.25m

Tax saved on R&D expenditure 26%/24%/23% £260k £240k £230k

Total £520k £540k £517.5k Cash credit on surrendered loss * 12.5%/11% £250k £247.5k £247.5k

* Surrender is restricted to company PAYE & NI for periods ending on or before 31/3/12, unlimited thereafter

Slide 16

PwC

Large company scheme

Unfunded / internal R&D Funded R&D

Internal cost

e.g. employees

External cost*

e.g. payments to

subcontractors

*with limited exceptions (e.g. payments to universities)

Policy objective - to increase investment in R&D to drive up productivity

Slide 17

PwC

forward indefinitely


Large company scheme: What is

the benefit?

Slide 18

Currently c7% cash value but falling to 6% as Corporation Tax (CT) rate drops to 20%.

No ability to surrender losses for repayment

Qualifying R&D £1m

Extra 30% £300k

The extra deduction will result in:

Tax saved @ 23% (FY13) £69k

Tax saved @ 20% (FY15) £60k

PwC

RDAs

• 100% tax depreciation (other than land).

• Covers expenditure both on carrying out R&D and on providing

R&D facilities (e.g. buildings).

• Expenditure should be allocated to R&D activities on a just and

reasonable basis, e.g. through a proportion of floor space or

headcount.

• There is a two year time limit for claiming RDAs.

Slide 19 18 April 2013

PwC

Which costs qualify for R&D relief?


PwC


What is qualifying expenditure?

• STAFFING COSTS

• The following costs qualify for staff involved in qualifying R&D activity

• Salaries, wages, bonuses etc

• Employer’s Class 1 NIC

• Employer’s payments to pension funds

• Reimbursed expenses

• But not

• Benefits, Class 1A, 1B NIC on benefits

• EXTERNALLY PROVIDED WORKERS

• In some instances payments to agencies/group employment companies for staff may qualify (please

• see below)

• SUBCONTRACT

• SME – 65% of subcontractor payments

• Large – payments to qualifying bodies only (100%)

• CONSUMABLE OR TRANSFORMABLE

MATERIALS

• Expenditure on materials and equipment used up

in the R&D activity

• Power, water and software used in R&D

• But not

• Supplies used indirectly e.g. overheads, insurance

etc

• Rent, rates, interest or lease payments

• Capital items or depreciation

CONTRIBUTION TO INDEPENDENT R&D

• In some instances payments to qualifying bodies

or contributions to independent R&D may qualify

Slide 21

PwC

Calculation methods


PwC

Project Cost

(£’000)

R&D

activity

Qualifying cost

(£’000)

1 300 300

2 250 0

3 150 90

4 50 50

750 440

100%

0%

60%

100%

Weighted average project percentage

R&D% = 440 = 58.7% Qualifying staff cost = 58.7% x staff cost 750


PwC

Function area percentages

R&D Tax Relief 24 April 2012

% qualifying

activities

Departments

AE BE CE DE EE HY PT Testing

New models 80% 95% 54% 95%

Significant upgrades 50% 100% 30% 100%

Minor upgrades 60% 100% 10% 100%

Other 75% 95% 40% 100%

Overall function % 95% 20% 100% 100%

PwC

Population average R&D content

claim

Spend £’m

Total spend 100 400 100 600

Average R&D % 40% 60% 80%

Qualifying Spend 40 240 80 360

40 60 80


R&D %

PwC

The New R&D Expenditure Credit (“RDEC”)


PwC

Overview of the new R&D

Expenditure Credit – A new 10% R&D credit (RDEC) is

available on expenditure incurred from 1 April 2013. It is taxable, so generates an 8% cash saving.

– It is like a grant, reducing the cost of R&D, unlike the current scheme which is tax. As R&D budget holders get the benefit in the numbers they are responsible for it should have more effect on investment decisions.

– It is given to large companies and SMEs claiming under the large company scheme.

– Companies initially have the option to elect for the RDEC or continue to claim the current super-deduction.

– For periods beginning on or after 1 April 2016, the super-deduction scheme is withdrawn and only the RDEC is available.


PwC

Overview of the new RDEC £10m R&D spend ‘Super

Deduction’ £’000

RDEC

£’000

RDEC Losses b/f

P&L Profit before tax (PBT) 15,000 16,000 16,000

Tax charge (see below) (2,400) (3,200) -

12,600 12,800 16,000

Tax Computation PBT 15,000 16,000 16,000

R&D deduction/losses b/f (3,000) - (16,000)

Taxable profit 12,000 16,000 -

Tax charge at 20% tax rate 2,400 3,200 -

Balance Sheet Tax Payable 2,400 3,200 -

R&D Credit (less withholding) (1,000) (800)

2,200 (800)


PwC

RDEC issues

• There is now a rate differential between the current super deduction (effective 6% cash tax

benefit) and the RDEC (effective 8% cash tax benefit).

• However, for contracts which are priced based on cost, there is a risk that the credit will be

clawed back, as the RDEC effectively reduces the cost of carrying out R&D work.

• Consideration of timing for electing into RDEC pre-April 2016. It is possible to elect into

the RDEC within two years, however the impact on the figures included in the accounts

should be considered. Once the election is made it is not possible to return to the super-

deduction scheme.

• Transfer pricing arrangements may need to be amended. Thought should be given to

whether the credit reduces the cost of R&D which is recharged (and whether the cost

marked up is net or gross of the credit).

• Impact on company bonuses (if determined by PBT) etc.

• Impact on effective tax rate and foreign tax credit available in parent territory for

subsidiaries of foreign multinationals.


• This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

• © 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Thank you.

SOCIETY OF MOTOR MANUFACTURERS AND TRADERS LIMITED

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