For some time there has been talk of the Government potentially making changes to the current R&D tax relief schemes in order to refocus the support that R&D tax credits provide for innovation. In March 2010 Sir James Dyson published his report, commissioned by The Conservative Party, which contained his, and other leading industrialists, engineers, academics and scientists, views on how to awaken Britain’s innate inventiveness and creativity. This proposed, amongst other ideas, refocusing the R&D tax relief on high tech companies, small businesses and new start ups.
In the June 2010 Budget the Government announced its intention to review the effectiveness of the R&D tax credit scheme and to consider the proposals made in the Dyson report. The resulting consultation document published in November 2010, and for which responses are invited to by 22 February 2011, sets out the Government’s thoughts on the potential to make changes to the current schemes. The consultation document covers two aspects of taxation concerning innovation and intellectual property. Firstly a possible approach to the design of a “Patent Box” regime which would introduce a 10% rate for profits arising from patents. Secondly the review of the support afforded to innovation by the existing R&D tax credits regime.
This article concentrates on the consultation on the R&D tax credits schemes. This covers the structure and scope of the schemes, the potential to refocus the schemes to encourage investment in R&D by the smallest companies, and the potential to streamline the claims process. Prior to the release of the consultation HMRC had commissioned independent research into the impact of the R&D tax credit schemes on the decision making processes of companies investing in R&D and had undertaken internal evaluation work on the impact of the schemes on the levels of R&D expenditure undertaken by companies. For some time it had been rumoured that, following the Dyson report, the schemes may have been under threat. It would appear that this is not the case and the document asks for the opinions of taxpayers and advisors on the following areas:
- Are there any structural changes that would significantly improve the impact of the schemes in stimulating R&D investment by UK companies?
- Are there any additional costs that should be eligible for relief?
- Are there any costs that should be excluded from the schemes? The document gives internal use software as an example of a cost that could be excluded. It is thought that this example probably refers to the costs of developing internal use software being excluded.
- Is the definition of R&D for tax purposes contained in the BIS (DTI) guidelines effective for recognising genuine R&D activity?
- Should there be a statutory definition of production and if so what should it include and exclude? Any activities which amount to production are currently excluded under current HMRC guidance on the interpretation of the BIS guidelines on the meaning of R&D.
- What enhancements would be most effective in promoting further investment in R&D by the smallest companies, without introducing more complexity?
- Is the Vaccine Research Relief (VRR) an effective way of incentivising R&D investment into drugs and vaccines targeted at the diseases most prevalent in less developed countries? Would it be more effective to deliver support under another mechanism? Recent statistics have shown that only ten claims a year are made under this scheme.
- Are there improvements to the claim process to streamline it and give more certainty over the outcome that could be made, particularly for smaller companies with more limited resources, for example an external auditing process or a formal pre clearance procedure?
Since the inception of the schemes in 2000 and 2002 there have been many changes to the legislation together with changes in the guidance on the practical application of the schemes and of the definition and interpretation of the meaning of R&D. This consultation gives the science and technology business community a chance to influence the policy direction in what many of these companies see as a vital support for the R&D they undertake.
As specialists in advising on R&D tax relief claims Kingly Brookes will be taking an active part in this process. We will be taking part in the joint BIS, HM Treasury & HMRC regional workshops taking place before the end of the consultation and would encourage anybody interested in this process to do the same. We will also be representing the views of our clients though our membership of the HMRC R&D Consultative Committee and our membership of the working group set up by HM Treasury to focus on the detailed policy issues resulting from the consultation exercise. We would be happy to meet with you to discuss any thoughts that you may wish to put forward as part of this process and to discuss the potential implications for your current claims. The closing date for responses is 22 February 2011.
Please do not hesitate to contact John Moore on 0207 292 8850 or at email@example.com if you would like to discuss this, or any other aspect of the R&D tax relief regime.
Corporate Tax Reform Consultation: Part 2B The taxation of innovation and intellectual property
Department for Business Innovation & Skills: Registration for regional consultation workshops