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According to Government figures, R&D tax credits provide nearly £1 billion of support to over 6000 UK companies. Over the past year, RJP has helped many clients to reduce their corporation tax bills – some to almost nothing – by taking advantage of the Government’s R&D tax credits scheme. This is a generous relief and allows over 200% of the money invested in qualifying R&D activities to be offset against corporation tax. To find out more about our R&D Tax Relief services click here.
In the 2012 Budget, the Chancellor reaffirmed his commitment to creating the right conditions to make the UK one of the best places globally to conduct business. Illustrating this, some important enhancements to the R&D tax credits scheme were announced, which make this even more attractive as a form of tax planning. In addition to the improvements confirmed in the Budget and the 2012 Finance Bill, the Government also intends to change the way tax relief awarded to companies via the R&D tax relief scheme is accounted for.
Above The Line Tax Credits – Rewarding hard work
The consultation document relating to this was published in late March 2012 and the change is referred to as the ‘Above The Line’ R&D Tax Credits. It is designed to make the impact of successful R&D tax relief claims more obvious to those actually doing the work, because instead of the benefit appearing in the annual accounts, it will be attributed as a reduction to the actual cost centre. So, a team of researchers will immediately see the benefit of their work and can be acknowledged within their organisations accordingly, instead of the benefit being lost in tax accounting fine print.
There are other changes. If a company does not pay corporation tax because it is loss making, it will be eligible for an ATL Credit as a payout under the new rules, which is a further benefit for larger organisations. Any credit payments would be made net of tax, with the tax withheld being carried forward for use against future corporation tax liabilities, possibly discounted over a number of years.
The introduction of an Above The Line R&D Tax Credit should be viewed as a positive development for companies of all sizes. In reality it is intended to incentivise larger organisations, where research teams will be more removed from the financial and business operations, than smaller firms where organisational communication tends to be more immediate and fluid.
Claiming R&D Tax relief – what has changed?
The main enhancements to be aware of are as follows:
1. Increase to the maximum relief allowance – from 200% to 225%
Starting from this month, the amount of tax relief available on R&D tax credit claims will increase to 225% from the previous 200%. This means that for every £10,000 a company or qualifying organisation spends on allowable research and development, they can receive further corporation tax relief of £12,500. This is in addition to the £10,000 of costs already written off as expenses before tax. If the company is loss making and the additional corporation tax relief is not attractive, it is possible as an alternative to claim a payable credit under the R&D Tax Credits scheme, by repayment of PAYE paid – this is in addition to the new Above The Line Tax Credits initiative being consulted on at the moment.
2. Removal of the cap to credit payable
In the past, there was a cap limiting the amount of the R&D cash credit payable in relation to the total amount of the company’s PAYE/NIC liability for a previous accounting period. This has now been removed for accounting periods ending on or after 1st April 2012 and it means that smaller companies could have greater access to increased cash refunds even if their salary and wage costs are relatively low, as a result of re-investing money back into the business.
3. Minimum spend of £10,000 abolished
This is particularly relevant for micro businesses because it removes the requirement to spend a minimum level on qualifying R&D activities before being eligible to claim R&D tax relief.
4. Claims can include R&D carried out by contract workers
In the past there have been strict rules governing the use of contract labour – consultants, IT contractors and freelancers operating as limited companies – the eligibility criteria for these have been difficult to navigate. Now, from April 2012, all the restrictions requiring research to have been conducted by employees have been removed. It’s a bonus for SMEs because it means they can recoup a broader range of R&D costs and also allows them to have access to highly skilled workers in a flexible way. Linked to the previous point, it also means start up and micro companies are more likely to be able to pursue a claim because their initial costs are more easily managed.
UK Patent Box Scheme – what is it?
Loosely connected to the R&D tax credits scheme, the Government has also launched a UK Patent Box Scheme, which is due to come into effect in 2013.
Under this initiative, companies who own patented products or processes (excluding trademarks or copyrights) will pay a 10% tax rate on worldwide profits attributable to those patents instead of paying whatever corporate tax rate is then in force.
This regime will be phased in from 1 April 2013 and is designed to attract innovative companies into the UK. The 10% tax rate applies to worldwide profits attributable to the patented invention. Qualifying profits include profits arising from licensing, disposals of patent rights and the sales of products which include patented inventions.
It is relevant to take a long term perspective when planning research and development activities and consider in advance whether you might benefit from the Patent Box initiative. For instance, would it be worthwhile pursuing a patent for types of technology that historically you may not have chosen to patent? Or, if you have operations overseas, would it be beneficial to centralise patent ownership in the UK and pay a flat 10% tax rate on global profits? These are questions worth asking one of RJP’s tax experts.
Zero risk with our no win no fee approach – take action to claim R&D tax relief
If you think there is even a small chance the R&D tax relief may apply to your company or idea for a start up, investigate the possibility further. RJP has a lot of experience in this area of tax planning and will take on claims based upon a no win; no fee basis.
To find out more about claiming for R&D tax relief or the UK Patent Box initiative, please email Lesley Stalker at las@rjp.co.uk.
