What do the April 1st R&D scheme changes mean for you?
1st April 2015 sees more changes to the UK R&D Tax Relief regime coming into force.
Originally announced in the 2014 Autumn Statement, these changes increase the tax incentives available for UK businesses investing in R&D, as well as adding new restrictions to consumables costs included in claims.
So, what do these changes really mean for you and your business?
Small & Medium Enterprises (SMEs)
The R&D tax relief rate for SMEs has now been increased from 225% to 230%.
If you’re currently making a loss, you could be eligible for a tax credit of up to 14.5%, resulting in a tax benefit of up to 33.35p per £1 of qualifying R&D expenditure.
If you’re making a profit, based on the current corporation tax rate of 20% (applicable from 1st April 2015), you could be receiving a tax benefit of 26p per £1 of R&D expenditure.
A voluntary advanced assurance scheme has also been introduced for small businesses. This scheme has been piloted previously and is designed to provide greater certainty to smaller claimants. It is a welcome move as it allows such businesses to seek free advice from HMRC prior to preparing and submitting a claim, therefore hopefully encouraging more businesses to claim this valuable relief. However, to be successful, the scheme needs to be allowed the appropriate level of resource from HMRC, and we question whether these resources are available in the current environment.
If you are classified by HMRC as a large company – or if you fail certain conditions of claiming SME R&D tax relief – you can currently claim either R&D Tax Relief or R&D Expenditure Credit (RDEC). The R&D tax relief rate for large companies remains the same at 130%, which results in a tax benefit of up to 6p per £1 of eligible R&D expenditure. However, the RDEC rate has been increased from 10% to 11%, meaning that you could be receiving a benefit of up to 8.8p per £1. Whilst making a change to this brand new scheme so soon after its introduction certainly increases complexity, the modest increase in the RDEC rate combined with the decrease in the main corporation tax rate means the increase in generosity is especially welcome.
This time next year will mark another change to the Large Company schemes, as we see R&D Tax Relief scrapped altogether. This will mean that all large companies will only be able to claim RDEC as of 1st April 2016. This measure was announced when RDEC was introduced in 2013 in order to soften the blow of such a major change in the mechanism for relief (and the associated administrative burden). In our experience, the vast majority of companies, both existing R&D tax relief claimants and new claimants, have opted to move to RDEC at the earliest opportunity. In some cases, companies have needed to consider very carefully the wider impact of switching from R&D tax relief to RDEC, particularly on group and other loss reliefs, and a minority have been left temporarily worse off under RDEC. Any R&D tax relief claimants (including SMEs who have previously claimed large company relief) who have not yet considered RDEC should do so now in order to ensure they can continue to receive the benefit of this vital incentive.
Restrictions to consumables costs
For expenditure incurred on or after 1st April 2015, under any of the R&D tax relief schemes, new restrictions apply to the eligibility of consumables costs.
Consumables are defined as consumable or transformable materials used in the R&D process. Previously, it has been necessary to demonstrate that materials were used for genuine R&D purposes, and did not form part of the company’s normal production activities, however if the materials, or the goods produced, went on to be sold to a customer, this did not affect the eligibility of that expenditure.
There are two main scenarios to consider:
1) Manufacturing trials
Where an R&D project includes production or manufacturing trials in order to test the advance made, often-saleable goods may be produced, or waste materials may be sold on to recoup some of the significant costs of these types of trials. The position prior to April 2015 was that, provided the trial was a genuine R&D trial, up to the point at which the scientific or technological uncertainties had been resolved, materials necessary for the trial to be held would be eligible for relief as consumables costs. With the changes introduced, any materials that form part of an item, which is then sold on, would not be eligible for relief.
Not only is this change going to reduce certain claims, it is also going to introduce a potential additional record keeping burden on manufacturing companies so that eligible and ineligible costs can be identified for the purposes of the claim.
It should also be noted that HMRC has confirmed that it is not the intention for this new legislation to catch the scenario where waste materials are sold for scrap or at a significantly reduced price.
2) First of class prototype
This refers to situations where it is not feasible to produce a prototype for testing, usually because the item being built is too large, complex and expensive, such as a building, wind turbine or nuclear submarine. Currently, in building a first of class prototype, companies can identify materials costs which relate closely to the specific advances sought and include these in their R&D claim despite them also being incorporated in the end item, which is then sold to a customer. These costs will now also cease to be eligible from 1st April 2015.
These two scenarios have been the subject of a great deal of debate between claimants, advisors and HMRC over many years. Our view is that this change is a move by the Government to draw a line under any uncertainty or grey area, whilst also funding the two rate increases, which will benefit a great number of claimants. The measure will put a significant dent in a minority of very large R&D claims; however there will also be a huge number of claimants who will be completely untouched by the change.
Want to find out how to maximise the value of your R&D claim or whether you could be eligible?
Contact our team on 020 30 58 58 00 or send us an enquiry.