This is the next stage in the consultation process following on from the consultation launched in November of 2010. The responses to that consultation have been considered and indeed the budget in March of 2011 contained some of the enhancements to the SME scheme suggested, being the increases in the additional tax deduction from 75% to 100% from 1 April 2011 and to 125% from 1 April 2012, subject to EC approval.
The latest stage in the process comments on the consultation responses received to date and includes further consultation on the Government’s views on potential changes to the schemes. These are aimed at removing barriers currently experienced by companies claiming the credit and providing greater certainty about what costs qualify for the relief. The following is an overview of the key proposals.
‘Above the line’ accounting for the relief
The most significant response from large companies was a proposal to move from the current super deduction method to a system that uses the relief to directly reduce the company’s tax liability rather than being a reduction in the tax charge in the profit and loss as it is at present. It is believed that this will enable the benefits of the relief to be delivered more directly to the R&D departments, rather than to the finance function, thus more directly encouraging increased R&D activity. If a company does not have enough corporation tax liability to offset against the above the line credit then it has been suggested that the credit could be offset against other taxes payable. This payable credit would also, for the first time, allow companies claiming under the large company scheme to obtain an immediate cash benefit if they were in a loss making position. The Government recognises that this proposal would be a major upheaval to an already well understood system and are seeking the views of business on how such a move would stimulate additional R&D in the UK. In addition they invite views on how the additional complexities and potential costs to the Government of any implementation would be resolved and understood.
At the Budget it was recognised that where work is subcontracted into a company the current rules may lead to the work not qualifying as R&D in the hands of the company carrying out the work if, taken in isolation, this work is routine in nature, even if it is part of the customers R&D activities. It is proposed that the resolution of this issue would involve some collaboration between the parties. Views are being sought on the most practical way of determining that the subcontractors work is part of the customers qualifying project so that the subcontractor can claim. Potential solutions suggested could include either a certification from the customer that the work is qualifying R&D or a joint election between both parties, both designed to allow the subcontractor to claim for the work.
Not surprisingly respondents to the first consultation suggested a wide range of additional costs that they considered were part of the R&D process and should be included for additional relief.
One area which it was felt restricted the ability of companies to claim was in the area of externally provided workers, one example of which is agency staff and another is staff employed within a group but working for various group companies. It is proposed that the currently restrictive definition of exactly which contractual arrangements between the claimant company and the staff provider or agency company, and any other companies involved, qualify for the relief is to be widened in the forthcoming legislation to be released in the autumn. It is hoped that this will allow claims previously denied where the substance of the arrangement is that of the provision of staff carrying out R&D despite the precise legal structure of the arrangements.
However the Government has decided that no other additional categories of qualifying expenditure will be added as it feels that these would only produce limited additional benefit in comparison to the amount of additional complexity in the legislation required.
Removal of the PAYE/NIC cap
The Budget announced the welcome withdrawal of the PAYE/NIC cap on the amount of cash credit that a loss making SME could claim. This will allow SME companies currently restricted in the amount of cash credit they can claim to access greater levels of financing from the Government. This is scheduled to come into effect from 1 April 2012 and will particularly benefit those companies who incur much of their costs not on employees but in subcontracted out R&D activities or where there is no or little remuneration for the employees or directors. However HM Treasury are interested in understanding the views of business on the potential for this significant future enhancement of the benefit of the relief to be abused.
Currently SMEs are unable to claim the SME relief if the company is not a going concern at the time the claim is made. This test is by reference to the latest published set of accounts. The Government are concerned that this is not flexible enough as the company’s circumstances may have changed since these accounts were published. They are proposing a move to a test based on the EC guidelines on companies in difficulty, which are currently used in determining the availability of tax relief for the UKs Enterprise Investment and Venture Capital trust schemes. In our view these are considerably more subjective in nature, which may also lead to uncertainty in practice.
Following a rethink on the practical application of previously published guidance on the inclusion of certain costs of goods produced, and a period of working with companies to resolve claim disputes on this point, HMRC will be improving their guidance in this area. This will make it clear that where goods are created it is the degree to which their creation directly contributed to an advance by resolving technological or scientific uncertainty that will determine whether or not they can be claimed. This change in stance and the recognition by HMRC of the commercial realities involved and that improved guidance is required to give taxpayers certainty over the amounts to be claimed is welcome.
The response to the setting up of a formal advance clearance process for R&D claims, in order to give claimants certainty, was mixed. Claimants can currently discuss issues with the Specialist R&D units. However it is proposed to operate a pilot scheme, to be introduced in the autumn, to determine how best to introduce a more formal system of voluntary advance assurances on claims to be made by SMEs and new start ups who have yet to make their first claim. So it would appear that is not intended to cover those companies who are already claiming.
The intention is that companies applying for and receiving assurance on their claim methodology would be able, unless their circumstances change, to be able to rely on this for several years. This should provide more certainty over the amounts to be claimed and over any cash credit.
In our view the continued consultation, and the fact that the Budget included a real demonstration of the desire to listen to the consultation responses on a wide range of issues, is a very positive step in ensuring that the R&D tax relief schemes promote companies to carry out additional R&D and help to attract internationally mobile R&D into the UK for the wider benefit.
As specialists in advising on R&D tax relief claims Kingly Brookes are taking an active part in this process. 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 31 August 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.
Research and Development tax credits- response and further consultation – HM Treasury June 2011:
Corporate Tax Reform Consultation: